CHAPTER 7 FLEXIBLE BUDGETS, DIRECT-COST VARIANCES, AND MANAGEMENT CONTROL 7-16 (2030 min.) Flexible b !

"e#$ Variance Analysis for Brabham Enterprises for August 2009

A%# &l Re' l#' (1) 2"#00g &3'3"(00a 229"(00! #+"000 )0"000g & 3+"000 FlexibleB !"e# V&*i&+%e' (,) - (1) . (/) 0 & )"(00 * 22"+00 '("#00 +"000 * &'2"#00 Flexible B !"e# (/) 2"#00 &30#"000b 20,"200e '00"#00 )+"000g & +("#00 S&le'-V0l 1e V&*i&+%e' (2) - (/) . (3) 200 &22"000 '+"#00 * ,"200 0 & ,"200 S#&#i% B !"e# (3) 3"000g &330"000c 222"000f '0#"000 )+"000g & )+"000

nits (tires) sol! $e%enues Variable costs -ontribution margin *i.e! costs /perating income

&'2"#00 & ,"200 0otal fle.ible1bu!get %ariance &20"000 0otal static1bu!get %ariance
a

&''2 2 2"#00 3 &3'3"(00 &''0 2 2"#00 3 &30#"000 c &''0 2 3"000 3 &330"000 ! 4i%en. nit %ariable cost 3 &229"(00 5 2"#00 3 &#2 per tire e &,+ 2 2"#00 3 &20,"200 f &,+ 2 3"000 3 &222"000 g 4i%en
b

2.

0he 6ey information items are7 nits nit selling price nit %ariable cost *i.e! costs A%# &l 2"#00 & ''2 & #2 &)0"000 B !"e#e! 3"000 & ''0 & ,+ &)+"000

0he total static1bu!get %ariance in operating income is &20"000 . 0here is both an unfa%orable total fle.ible1bu!get %ariance (&'2"#00) an! an unfa%orable sales1%olume %ariance (&,"200). 0he unfa%orable sales1%olume %ariance arises solely because actual units manufacture! an! sol! 8ere 200 less than the bu!gete! 3"000 units. 0he unfa%orable fle.ible1bu!get %ariance of &'2"#00 in operating income is !ue primarily to the &# increase in unit %ariable costs. 0his increase in unit %ariable costs is only partially offset by the &2 increase in unit selling price an! the &+"000 !ecrease in fi.e! costs.

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7-17

(') min.) Flexible b !"e#$

0he e.isting performance report is a 9e%el ' analysis" base! on a static bu!get. :t ma6es no a!;ustment for changes in output le%els. 0he bu!gete! output le%el is '0"000 units!irect materials of &+00"000 in the static bu!get 5 bu!gete! !irect materials cost per attach< case of &+0. 0he follo8ing is a 9e%el 2 analysis that presents a fle.ible1bu!get %ariance an! a sales1 %olume %ariance of each !irect cost category. Variance Analysis for -onnor -ompany FlexibleS&le'A%# &l B !"e# Flexible V0l 1e Re' l#' V&*i&+%e' B !"e# V&*i&+%e' (1) (,) - (1) . (/) (/) (2) - (/) . (3) #"#00 0 #"#00 '"200 &3(+"000 &'2"000 &3)2"000 &+#"000 * ,#"000 ,"(00 ,0"+00 9"(00 * ''0"000 +"+00 '0)"(00 '+"+00 * &))2"000 &2+"000 &)2#"000 &,2"000 *
&2+"000 >ales1%olume %ariance &+#"000 * &,2"000 *

/utput units =irect materials =irect manufacturing labor =irect mar6eting labor 0otal !irect costs

S#&#i% B !"e# (3) '0"000 &+00"000 #0"000 '20"000 &(00"000

*le.ible1bu!get %ariance >tatic1bu!get %ariance

0he 9e%el ' analysis sho8s total !irect costs ha%e a &+#"000 fa%orable %ariance. ?o8e%er" the 9e%el 2 analysis re%eals that this fa%orable %ariance is !ue to the re!uction in output of '"200 units from the bu!gete! '0"000 units. /nce this re!uction in output is ta6en into account (%ia a fle.ible bu!get)" the fle.ible1bu!get %ariance sho8s each !irect cost category to ha%e an unfa%orable %ariance in!icating less efficient use of each !irect cost item than 8as bu!gete!" or the use of more costly !irect cost items than 8as bu!gete!" or both.
Each !irect cost category has an actual unit %ariable cost that e.cee!s its bu!gete! unit cost7

nits =irect materials =irect manufacturing labor =irect mar6eting labor

A%# &l #"#00 & +'.3( & #.#( & '2.)0

B !"e#e! '0"000 & +0.00 & #.00 & '2.00

Analysis of price an! efficiency %ariances for each cost category coul! assist in further the i!entifying causes of these more aggregate! (9e%el 2) %ariances.

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7-14 '.

(2)30 min.) Flexible-b !"e# 5*e5&*&#i0+ &+! &+&l6'i'$ Variance Analysis for Ban6 @anagement Arinters for >eptember 2009 Level 1 Analysis A%# &l Re' l#' (1) '2"000 &2)2"000a #+"000! '(#"000 ')0"000 & '#"000 S#&#i%-B !"e# V&*i&+%e' (,) - (1) . (/) 3"000 & +#"000 3("000 * '2"000 )"000 & ',"000 S#&#i% B !"e# (/) ')"000 &300"000c '20"000f '#0"000 '+)"000 & 3)"000

nits sol! $e%enue Variable costs -ontribution margin *i.e! costs /perating income

&',"000 0otal static1bu!get %ariance

2.

Level 2 Analysis
A%# &l Re' l#' (1) '2"000 &2)2"000a #+"000! '(#"000 ')0"000 & '#"000 FlexibleB !"e# V&*i&+%e' (,) - (1) . (/) 0 &'2"000 * '2"000 * 2+"000 * )"000 &'9"000 * Flexible B !"e# (/) '2"000 &2+0"000b 9("000e '++"000 '+)"000 & ('"000) S&le' V0l 1e S#&#i% V&*i&+%e' B !"e# (2) - (/) . (3) (3) 3"000 ')"000 &(0"000 &300"000c 2+"000 * '20"000f 3("000 '#0"000 0 '+)"000 &3("000 & 3)"000

nits sol! $e%enue Variable costs -ontribution margin *i.e! costs /perating income

&'9"000 * &3("000 0otal fle.ible1bu!get 0otal sales1%olume %ariance &',"000 0otal static1bu!get %ariance
a

'2"000 2 &2' 3 &2)2"000 '2"000 2 &20 3 &2+0"000 c ')"000 2 &20 3 &300"000

b

! e

'2"000 2 &, 3 & #+"000 '2"000 2 &# 3 & 9("000 f ')"000 2 &# 3 &'20"000

3. 9e%el 2 analysis brea6s !o8n the static1bu!get %ariance into a fle.ible1bu!get %ariance an! a sales1%olume %ariance. 0he primary reason for the static1bu!get %ariance being unfa%orable (&',"000 ) is the re!uction in unit %olume from the bu!gete! ')"000 to an actual '2"000. /ne e.planation for this re!uction is the increase in selling price from a bu!gete! &20 to an actual &2'. /perating management 8as able to re!uce %ariable costs by &'2"000 relati%e to the fle.ible bu!get. 0his re!uction coul! be a sign of efficient management. Alternati%ely" it coul! be !ue to using lo8er Buality materials (8hich in turn a!%ersely affecte! unit %olume).

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7-17

(30 min.) Flexible b !"e#, 80*9i+" b&%98&*!$

'. Variance Analysis for 0he -lar6son -ompany for the year en!e! =ecember 3'" 2009
A%# &l Re' l#' (1) '30"000 &,')"000 )')"000 200"000 '+0"000 & (0"000 FlexibleB !"e# V&*i&+%e' (,)-(1) (/) 0 &2(0"000 * 2))"000 )"000 * 20"000 & ')"000 &')"000 Flexible B !"e# (/) '30"000 &+))"000a 2(0"000b '9)"000 '20"000 & ,)"000 S&le'-V0l 1e V&*i&+%e' (2)-(/) (3) '0"000 * &3)"000 * 20"000 ')"000 * 0 &')"000 * &')"000 * S#&#i% B !"e# (3) '20"000 &+20"000 2+0"000 '#0"000 '20"000 & (0"000

nits sol! $e%enues Variable costs -ontribution margin *i.e! costs /perating income
a

fle.ible1bu!get '30"000 2 &3.)0 3 &+))"000C &+20"000 '20"000 3 &3.)0 %ariance 0otal 0otal sales %olume %ariance b '30"000 2 &2.00 3 &2(0"000C &2+0"000 '20"000 3 &2.00 &0 2.
Actual selling price7 Bu!gete! selling price7 Actual %ariable cost per unit7 Bu!gete! %ariable cost per unit7 0otal static1bu!get %ariance &,')"000 '30"000 3 +20"000 5 '20"000 3 )')"000 5 '30"000 3 2+0"000 5 '20"000 3 &).)0 &3.)0 &3.9( &2.00

3. A Dero total static1bu!get %ariance may be !ue to offsetting total fle.ible1bu!get an! total sales1%olume %ariances. :n this case" these t8o %ariances e.actly offset each other7
0otal fle.ible1bu!get %ariance 0otal sales1%olume %ariance &')"000 nfa%orable &')"000 *a%orable

A closer loo6 at the %ariance components re%eals some ma;or !e%iations from plan. Actual %ariable costs increase! from &2.00 to &3.9(" causing an unfa%orable fle.ible1bu!get %ariable cost %ariance of &2))"000. >uch an increase coul! be a result of" for e.ample" a ;ump in !irect material prices. -lar6son 8as able to pass most of the increase in costs onto their customersEactual selling price increase! by ),F G(&).)0 &3.)0) &3.)0H" bringing about an offsetting fa%orable fle.ible1bu!get re%enue %ariance in the amount of &2(0"000. An increase in the actual number of units sol! also contribute! to more fa%orable results. 0he company shoul! e.amine 8hy the units sol! increase! !espite an increase in !irect material prices. *or e.ample" -lar6sonIs customers may ha%e stoc6e! up" anticipating future increases in !irect material prices. Alternati%ely" -lar6sonIs selling price increases may ha%e been lo8er than competitorsI price increases. n!erstan!ing the reasons 8hy actual results !iffer from bu!gete! amounts can help -lar6son better manage its costs an! pricing !ecisions in the future. 0he important lesson learne! here is that a superficial e.amination of summary le%el !ata (9e%els 0 an! ') may be insufficient. :t is imperati%e to scrutiniDe !ata at a more !etaile! le%el (9e%el 2). ?a! -lar6son not been able to pass costs on to customers" losses 8oul! ha%e been consi!erable.

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7-,:

(301+0 min.) Flexible b !"e# &+! '&le' ;0l 1e ;&*i&+%e'$

'. an! 2. Pe*<0*1&+%e Re50*# <0* M&**0+, I+%$, = +e ,::7 Flexible B !"e# V&*i&+%e' (,) - (1) . (/) 1 & )2")00 )2")00 &'0)"000 S#&#i% B !"e# V&*i&+%e (6) - (1) . (3) 2)"000 * &''0"000 * '+0"000 & 30"000 S#&#i% B !"e# V&*i&+%e &' > 0< S#&#i% B !"e# (7) - (6) (3) ).0F 3.+F #.0F 2.0F

nits (poun!s) $e%enues Variable mfg. costs -ontribution margin

A%# &l (1) )2)"000 &3"3(0"000 '"#90"000 &'"+,0"000

Flexible B !"e# (/) )2)"000 &3"+'2")00a '"#3,")00b &'"),)"000

S&le' V0l 1e V&*i&+%e' (2) - (/) . (3) 2)"000 * &'(2")00 * #,")00 & ,)"000 *

S#&#i% B !"e# (3) )00"000 &3"2)0"000 '",)0"000 &'")00"000

&'0)"000 *le.ible1bu!get %ariance

& ,)"000 * >ales1%olume %ariance

&30"000 >tatic1bu!get %ariance

a

Bu!gete! selling price 3 &3"2)0"000 )00"000 lbs 3 &(.)0 per lb. *le.ible1bu!get re%enues 3 &(.)0 per lb. )2)"000 lbs. 3 &3"+'2")00 Bu!gete! %ariable mfg. cost per unit 3 &'",)0"000 *le.ible1bu!get %ariable mfg. costs 3 &3.)0 per lb.

)00"000 lbs. 3 &3.)0 )2)"000 lbs. 3 &'"#3,")00

,1)

3. 0he selling price %ariance" cause! solely by the !ifference in actual an! bu!gete! selling price" is the fle.ible1bu!get %ariance in re%enues 3 &)2")00 . +. 0he fle.ible1bu!get %ariances sho8 that for the actual sales %olume of )2)"000 poun!s" selling prices 8ere lo8er an! costs per poun! 8ere higher. 0he fa%orable sales %olume %ariance in re%enues (because more poun!s of ice cream 8ere sol! than bu!gete!) helpe! offset the unfa%orable %ariable cost %ariance an! shore! up the results in June 2009. 9e%ine shoul! be more concerne! because the small static1bu!get %ariance in contribution margin of &30"000 is actually ma!e up of a fa%orable sales1%olume %ariance in contribution margin of &,)"000" an unfa%orable selling1price %ariance of &)2")00 an! an unfa%orable %ariable manufacturing costs %ariance of &)2")00. 9e%ine shoul! analyDe 8hy each of these %ariances occurre! an! the relationships among them. -oul! the efficiency of %ariable manufacturing costs be impro%e!K =i! the sales %olume increase because of a !ecrease in selling price or because of gro8th in the o%erall mar6etK Analysis of these Buestions 8oul! help 9e%ine !eci!e 8hat actions he shoul! ta6e.

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7-,1
'.

(2030 min.) P*i%e &+! e<<i%ie+%6 ;&*i&+%e'$

0he 6ey information items are7

/utput units (scones) :nput units (poun!s of pump6in) -ost per input unit

A%# &l (0"#00 '("000 & 0.#2

B !"e#e! (0"000 ')"000 & 0.#9

Aeterson bu!gets to obtain + pump6in scones from each poun! of pump6in. 0he fle.ible1bu!get %ariance is &+0# *. A%# &l Re' l#' (1) &'3"'20a FlexibleB !"e# V&*i&+%e (,) - (1) . (/) &+0# * Flexible B !"e# (/) &'3")2#b S&le'-V0l 1e S#&#i% V&*i&+%e B !"e# (2) - (/) . (3) (3) &',# &'3"3)0c

Aump6in costs
a b

'("000 2 &0.#2 3 &'3"'20 (0"#00 2 0.2) 2 &0.#9 3 &'3")2# c (0"000 2 0.2) 2 &0.#9 3 &'3"3)0

2. A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ @ A%# &l P*i%e) &'3"'20a A%# &l I+5 # ?#6$ @ B !"e#e! P*i%e &'+"2+0b

Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # @ B !"e#e! P*i%e) &'3")2#c

&'"'20 * &,'2 Arice %ariance Efficiency %ariance &+0# * *le.ible1bu!get %ariance

a

'("000 2 &0.#2 3 &'3"'20 '("000 2 &0.#9 3 &'+"2+0 c (0"#00 2 0.2) 2 &0.#9 3 &'3")2#
b

3.

0he fa%orable fle.ible1bu!get %ariance of &+0# has t8o offsetting components7 (a) fa%orable price %ariance of &'"'20reflects the &0.#2 actual purchase cost being lo8er than the &0.#9 bu!gete! purchase cost per poun!. (b) unfa%orable efficiency %ariance of &,'2reflects the actual materials yiel! of 3.#0 scones per poun! of pump6in ((0"#00 5 '("000 3 3.#0) being less than the bu!gete! yiel! of +.00 ((0"000 5 ')"000 3 +.00). 0he company use! more pump6ins (materials) to ma6e the scones than 8as bu!gete!.

/ne e.planation may be that Aeterson purchase! lo8er Buality pump6ins at a lo8er cost per poun!.

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7-,, (') min.) M&#e*i&l' &+! 1&+ <&%# *i+" l&b0* ;&*i&+%e'$ A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ @ A%# &l P*i%e) &200"000 Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # @ B !"e#e! P*i%e) &22)"000

=irect @aterials

A%# &l I+5 # ?#6$ @ B !"e#e! P*i%e &2'+"000

&'+"000 * &''"000 * Arice %ariance Efficiency %ariance &2)"000 * *le.ible1bu!get %ariance =irect @fg. 9abor &90"000 &#("000 &#0"000

&+"000 &("000 Arice %ariance Efficiency %ariance &'0"000 *le.ible1bu!get %ariance

7-,/ '.

(30 min.)

Di*e%# 1&#e*i&l' &+! !i*e%# 1&+ <&%# *i+" l&b0* ;&*i&+%e'$

A%# &l ? &+#i#6 B !"e#e! P*i%e (/) &'0"#90.00a & #"3(0.00c

M&6 ,::7 nits =irect materials =irect labor 0otal price %ariance 0otal efficiency %ariance
a b

A%# &l Re' l#' (1) ))0 &'2",0).00 & #"+(+.)0

P*i%e V&*i&+%e (,) - (1).(/) &'"#').00 & '0+.)0 &'"9'9.)0

E<<i%ie+%6 V&*i&+%e (2) - (/) . (3) &990.00 &++0.00 &))0.00 *

Flexible B !"e# (3) ))0 &9"900.00b &#"#00.00!

,"2(0 meters &'.)0 per meter 3 &'0"#90 ))0 lots '2 meters per lot &'.)0 per meter 3 &9"900 c '"0+) hours &#.00 per hour 3 &#"3(0 ! ))0 lots 2 hours per lot &# per hour 3 &#"#00

0otal fle.ible1bu!get %ariance for both inputs 3 &'"9'9.)0 L &))0 3 &2"+(9.)0 0otal fle.ible1bu!get cost of !irect materials an! !irect labor 3 &9"900 L &#"#00 3 &'#",00 0otal fle.ible1bu!get %ariance as F of total fle.ible1bu!get costs 3 &2"+(9.)0 &'#",00 3 '3.2'F

,1#

2.
M&6 ,:1: nits =irect materials =irect manuf. labor 0otal price %ariance 0otal efficiency %ariance
a

A%# &l Re' l#' (1) ))0 &''"#2#.3(a & #"29).2'!

P*i%e V&*i&+%e (,) - (1) . (/) &'"')(.'( & '02.+' &'"2)#.),

A%# &l ? &+#i#6 B !"e#e! P*i%e (/) &'0"(,2.20b & #"'92.#0e

E<<i%ie+%6 V&*i&+%e (2) - (/) . (3) &,,2.20 &(0,.20 &'().00 *

Flexible B !"e# (3) ))0 &9"900.00c &#"#00.00c

Actual !ir. mat. cost" @ay 20'0 3 Actual !ir. mat. cost" @ay 2009 0.9# 0.9) 3 &'2",0) 0.9# 0.9) 3 &''.#2#.3( Alternati%ely" actual !ir. mat. cost" @ay 20'0 3 (Actual !ir. mat. Buantity use! in @ay 2009 0.9#) (Actual !ir. mat. price in @ay 2009 0.9)) 3 (,"2(0 meters 0.9#) (&'.,)Mmeter 0.9)) 3 ,"''+.#0 &'.((2) 3 &''"#2#.3( b (,"2(0 meters 0.9#) &'.)0 per meter 3 &'0"(,2.20 c nchange! from 2009. ! Actual !ir. labor cost" @ay 20'0 3 Actual !ir. manuf. cost @ay 2009 0.9# 3 &#"+(+.)0 0.9# 3 &#"29).2' Alternati%ely" actual !ir. labor cost" @ay 20'0 3 (Actual !ir. manuf. labor Buantity use! in @ay 2009 0.9#) Actual !ir. labor price in 2009 3 ('"0+) hours 0.9#) &#.'0 per hour 3 '"02+.'0 hours &#.'0 per hour 3 &#"29).2' e ('"0+) hours 0.9#) &#.00 per hour 3 &#"'92.#0

0otal fle.ible1bu!get %ariance for both inputs 3 &'"2)#.), L &'() 3 &'"+23.), 0otal fle.ible1bu!get cost of !irect materials an! !irect labor 3 &9"900 L &#"#00 3 &'#",00 0otal fle.ible1bu!get %ariance as F of total fle.ible1bu!get costs 3 &'"+23.), &'#",00 3 ,.('F 3. Efficiencies ha%e impro%e! in the !irection in!icate! by the pro!uction managerEbut" it is unclear 8hether they are a tren! or a one1time occurrence. Also" o%erall" %ariances are still ,.(F of fle.ible input bu!get. 4loria=ee shoul! continue to use the ne8 material" especially in light of its superior Buality an! feel" but it may 8ant to 6eep the follo8ing points in min!7 0he ne8 material costs substantially more than the ol! (&'.,) in 2009 an! &'.((2) in 20'0 %s. &'.)0 per meter). :ts price is unli6ely to come !o8n e%en more 8ithin the coming year. >tan!ar! material price shoul! be re1e.amine! an! possibly change!. 4loria=ee shoul! continue to 8or6 to re!uce !irect materials an! !irect manufacturing labor content. 0he re!uctions from @ay 2009 to @ay 20'0 are a goo! !e%elopment an! shoul! be encourage!.

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7-,2

(30 min.)

P*i%e &+! e<<i%ie+%6 ;&*i&+%e', A0 *+&l e+#*ie'$

Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # @ B !"e#e! P*i%e) (9"#)0 @ '0 @ &+.)0) &++3"2)0

'. =irect materials an! !irect manufacturing labor are analyDe! in turn7
A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ @ A%# &l P*i%e) ('00"000 @ &+.()a) &+()"000

A%# &l I+5 # ?#6$ @ B !"e#e! P*i%e Aurchases sage ('00"000 @ &+.)0) &+)0"000 (9#"0)) @ &+.)0) &++'"2+#

=irect @aterials

&')"000 Arice %ariance =irect @anufacturing 9abor (+"900 @ &3'.)b) &')+"3)0 (+"900 @ &30) &'+,"000 &,"3)0 Arice %ariance
a b

&2"002 * Efficiency %ariance (9"#)0 @ 0.) @ &30) or (+"92) @ &30) &'+,",)0 &,)0 * Efficiency %ariance

&+()"000 5 '00"000 3 &+.() &')+"3)0 5 +"900 3 &3'.)

2.

=irect @aterials -ontrol =irect @aterials Arice Variance Accounts Aayable or -ash -ontrol Nor61in1Arocess -ontrol =irect @aterials -ontrol =irect @aterials Efficiency Variance Nor61in1Arocess -ontrol =irect @anuf. 9abor Arice Variance Nages Aayable -ontrol =irect @anuf. 9abor Efficiency Variance

+)0"000 ')"000 +()"000 ++3"2)0 ++'"2+# 2"002 '+,",)0 ,"3)0 ')+"3)0 ,)0

3. >ome stu!entsI comments 8ill be immerse! in con;ecture about higher prices for materials" better Buality materials" higher gra!e labor" better efficiency in use of materials" an! so forth. A possibility is that appro.imately the same labor force" pai! some8hat more" is ta6ing slightly less time 8ith better materials an! causing less 8aste an! spoilage. A 6ey point in this problem is that all of these efficiency %ariances are li6ely to be insignificant. 0hey are so small as to be nearly meaningless. *luctuations about stan!ar!s are boun! to occur in a ran!om fashion. Aractically" from a control %ie8point" a stan!ar! is a ban! or range of acceptable performance rather than a single1figure measure. +. 0he purchasing point is 8here responsibility for price %ariances is foun! most often. 0he pro!uction point is 8here responsibility for efficiency %ariances is foun! most often. 0he @onroe -orporation may calculate %ariances at !ifferent points in time to tie in 8ith these

!ifferent responsibility areas.

7-,3 '.

(20 min.) C0+#i+ 0 ' i15*0;e1e+# (%0+#i+ &#i0+ 0< 7-,2)$

>tan!ar! Buantity input amounts per output unit are7 Di*e%# Di*e%# M&#e*i&l' M&+ <&%# *i+" L&b0* (50 +!') (B0 *') January '0.000 0.)00 *ebruary (Jan. 2 0.9##) 9.##0 0.+9+ @arch (*eb. 2 0.9##) 9.,(' 0.+## 2. 0he ans8er is the same as that for reBuirement ' of Ouestion ,12+" e.cept for the fle.ible1bu!get amount.
A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ 2 A%# &l P*i%e) =irect @aterials ('00"000 2 &+.()a) &+()"000 Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # 2 B !"e#e! P*i%e) (9"#)0 2 9.,(' 2 &+.)0) &+32"()(

A%# &l I+5 # ?#6$ 2 B !"e#e! P*i%e Aurchases sage ('00"000 2 &+.)0) (9#"0)) 2 &+.)0) &+)0"000 &++'"2+#

&')"000 Arice %ariance =irect @anuf. 9abor (+"900 2 &3'.)b) &')+"3)0 &,"3)0 Arice %ariance
a b

&#")92 Efficiency %ariance (+"900 2 &30) &'+,"000 (9"#)0 2 0.+## 2 &30) &'++"20+ &2",9( Efficiency %ariance

&+()"000 5 '00"000 3 &+.() &')+"3)0 5 +"900 3 &3'.)

sing continuous impro%ement stan!ar!s sets a tougher benchmar6. 0he efficiency %ariances for January (from E.ercise ,12+) an! @arch (from E.ercise ,12)) are7 =irect materials =irect manufacturing labor =&+ &*6 &2"002 * & ,)0 * M&*%B &#")92 &2",9(

Pote that the Buestion assumes the continuous impro%ement applies only to Buantity inputs. An alternati%e approach is to ha%e continuous impro%ement apply to the total bu!gete! input cost per output unit (&+) for !irect materials in January an! &') for !irect manufacturing labor in January).

7-,6 '.

(2030 min.) M&#e*i&l' &+! 1&+ <&%# *i+" l&b0* ;&*i&+%e', '#&+!&*! %0'#'$ =irect @aterials
Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # 2 B !"e#e! P*i%e) (2"000 2 2 2 &).00) (+"000 sB. y!s. 2 &).00) &20"000

A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ 2 A%# &l P*i%e) (3",00 sB. y!s. 2 &).'0) &'#"#,0

A%# &l I+5 # ?#6$ 2 B !"e#e! P*i%e (3",00 sB. y!s. 2 &).00) &'#")00

&3,0 Arice %ariance

&'")00 * Efficiency %ariance &'"'30 * *le.ible1bu!get %ariance

0he unfa%orable materials price %ariance may be unrelate! to the fa%orable materials efficiency %ariance. *or e.ample" (a) the purchasing officer may be less s6illful than assume! in the bu!get" or (b) there 8as an une.pecte! increase in materials price per sBuare yar! !ue to re!uce! competition. >imilarly" the fa%orable materials efficiency %ariance may be unrelate! to the unfa%orable materials price %ariance. *or e.ample" (a) the pro!uction manager may ha%e been able to employ higher1s6ille! 8or6ers" or (b) the bu!gete! materials stan!ar!s 8ere set too loosely. :t is also possible that the t8o %ariances are interrelate!. 0he higher materials input price may be !ue to higher Buality materials being purchase!. 9ess material 8as use! than bu!gete! !ue to the high Buality of the materials. =irect @anufacturing 9abor A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ 2 A%# &l P*i%e) (900 hrs. 2 &9.#0) &#"#20 Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # 2 B !"e#e! P*i%e) (2000 2 0.) 2 &'0.00) ('"000 hrs. 2 &'0.00) &'0"000

A%# &l I+5 # ?#6$ 2 B !"e#e! P*i%e (900 hrs. 2 &'0.00) &9"000

&'#0 * Arice %ariance

&'"000 * Efficiency %ariance

&'"'#0 * *le.ible1bu!get %ariance

0he fa%orable labor price %ariance may be !ue to" say" (a) a re!uction in labor rates !ue to a recession" or (b) the stan!ar! being set 8ithout !etaile! analysis of labor compensation. 0he fa%orable labor efficiency %ariance may be !ue to" say" (a) more efficient 8or6ers being employe!" (b) a re!esign in the plant enabling labor to be more pro!ucti%e" or (c) the use of higher Buality materials.

2. A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ 2 A%# &l P*i%e) (("000 sB. y!s.2 &).'0) &30"(00 Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # 2 B !"e#e! P*i%e)

C0+#*0l P0i+# Aurchasing

A%# &l I+5 # ?#6$ 2 B !"e#e! P*i%e (("000 sB. y!s. 2 &).00) &30"000

&(00 Arice %ariance

Aro!uction

(3",00 sB. y!s.2 &).00) &'#")00

(2"000 2 2 2 &).00) &20"000

&'")00 * Efficiency %ariance

=irect manufacturing labor %ariances are the same as in reBuirement '.

7-,7

(')2) min.) =0 *+&l e+#*ie' &+! T-&%%0 +#' (%0+#i+ &#i0+ 0< 7-,6)$ =irect @aterials -ontrol '#")00 3,0 '#"#,0 20"000 '")00 '#")00

*or reBuirement ' from E.ercise ,12(7 a. =irect @aterials Arice Variance Accounts Aayable -ontrol 0o recor! purchase of !irect materials. b. Nor61in1Arocess -ontrol =irect @aterials Efficiency Variance =irect @aterials -ontrol 0o recor! !irect materials use!.

c. Nor61in1Arocess -ontrol '0"000 =irect @anufacturing 9abor Arice Variance =irect @anufacturing 9abor Efficiency Variance Nages Aayable -ontrol 0o recor! liability for an! allocation of !irect labor costs. =irect @aterials -ontrol (a) '#")00 (b) '#")00 Nor61in1Arocess -ontrol (b) 20"000 (c) '0"000 Nages Aayable -ontrol (c) #"#20 =irect @aterials Arice Variance (a) 3,0 =irect @anufacturing 9abor Arice Variance (c) '#0 Accounts Aayable -ontrol (a) '#"#,0

'#0 '"000 #"#20

=irect @aterials Efficiency Variance (b) '")00 =irect @anuf. 9abor Efficiency Variance (c) '"000

*or reBuirement 2 from E.ercise ,12(7 0he follo8ing ;ournal entries pertain to the measurement of price an! efficiency %ariances 8hen ("000 sB. y!s. of !irect materials are purchase!7 a'. =irect @aterials -ontrol =irect @aterials Arice Variance Accounts Aayable -ontrol 0o recor! !irect materials purchase!. a2. Nor61in1Arocess -ontrol =irect @aterials -ontrol =irect @aterials Efficiency Variance 0o recor! !irect materials use!. 30"000 (00 30"(00 20"000 '#")00 '")00

=irect @aterials -ontrol (a') 30"000 (a2) '#")00 Accounts Aayable -ontrol (a') 30"(00 =irect @aterials Efficiency Variance (a2) '")00

=irect @aterials Arice Variance (a') (00 Nor61in1Arocess -ontrol (a2) 20"000

0he 01account entries relate! to !irect manufacturing labor are the same as in reBuirement '. 0he !ifference bet8een stan!ar! costing an! normal costing for !irect cost items is7 =irect -osts S#&+!&*! C0'#' >tan!ar! price(s) 2 >tan!ar! input allo8e! for actual outputs achie%e! N0*1&l C0'#' Actual price(s) 2 Actual input

0hese ;ournal entries !iffer from the normal costing entries because Nor61in1Arocess -ontrol is no longer carrie! at QactualR costs. *urthermore" =irect @aterials -ontrol is carrie! at stan!ar! unit prices rather than actual unit prices. *inally" %ariances appear for !irect materials an! !irect manufacturing labor un!er standard costing but not un!er normal costing.

7-,4 (2) min.)

Flexible b !"e# (Re<e* #0 !&#& i+ Exe*%i'e 7-,6)$

A more !etaile! analysis un!erscores the fact that the 8orl! of %ariances may be !i%i!e! into three general parts7 price" efficiency" an! 8hat is labele! here as a sales1%olume %ariance. *ailure to pinpoint these three categories mu!!ies the analytical tas6. 0he clearer analysis follo8s (in !ollars)7 A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ 2 A%# &l A%# &l I+5 # ?#6$ P*i%e) 2 B !"e#e! P*i%e =irect @aterials &'#"#,0 (a) &3,0 =irect @anuf. 9abor &'#")00 (b) &'")00 * Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # 2 B !"e#e! P*i%e) &20"000

S#&#i% B !"e# &2)"000

(c) &)"000 *

&#"#20 (a) &'#0 *

&9"000 (b) &'"000 *

&'0"000

&'2")00

(c) &2")00 *

(a) Arice %ariance (b) Efficiency %ariance (c) >ales1%olume %ariance 0he sales1%olume %ariances are fa%orable here in the sense that less cost 8oul! be e.pecte! solely because the output le%el is less than bu!gete!. ?o8e%er" this is an e.ample of ho8 %ariances must be interprete! cautiously. @anagers may be incense! at the failure to reach sche!ule! pro!uction (it may mean fe8er sales) e%en though the 2"000 units 8ere turne! out 8ith supreme efficiency. >ometimes this phenomenon is calle! being efficient but ineffecti%e" 8here effecti%eness is !efine! as the ability to reach original targets an! efficiency is the optimal relationship of inputs to any gi%en outputs. Pote that a target can be reache! in an efficient or inefficient 8ayC similarly" as this problem illustrates" a target can be misse! but the gi%en output can be attaine! efficiently.

7-,7 '.

(+))0 min.) A%#i;i#6-b&'e! %0'#i+", <lexible-b !"e# ;&*i&+%e' <0* <i+&+%e-< +%#i0+ &%#i;i#ie'$

Receivables $ecei%ables is an output unit le%el acti%ity. :ts fle.ible1bu!get %ariance can be calculate! as follo8s7 3 3 (&0.#0 2 9+)"000) (&0.(39 2 9+)"000) 3 &,)("000 &(03"#)) 3 &')2"'+) Payables Aayables is a batch le%el acti%ity. S#&#i%-b !"e#

a. b. c. !. e.

Pumber of !eli%eries Batch siDe (units per batch) Pumber of batches (a 5 b) -ost per batch 0otal payables acti%ity cost (c 2 !)

A%# &l A10 +#' '"000"000 ) 200"000 &2.90 &)#0"000

A10 +#' 9+)"000 +.+(# 2''")0+ &2.#) &(02",#(

>tep '7 0he number of batches in 8hich payables shoul! ha%e been processe! 3 9+)"000 actual units 5 ) bu!gete! units per batch 3 '#9"000 batches >tep 27 0he fle.ible1bu!get amount for payables 3 '#9"000 batches 2 &2.90 bu!gete! cost per batch 3 &)+#"'00 0he fle.ible1bu!get %ariance can be compute! as follo8s7 *le.ible1bu!get %ariance 3 Actual costs *le.ible1bu!get costs 3 (2''")0+ 2 &2.#)) ('#9"000 2 &2.90) 3 &(02",#( &)+#"'00 3 &)+"(#(

Travel expenses 0ra%el e.penses is a batch le%el acti%ity. S#&#i%-B !"e# a. b. c. !. e. Pumber of !eli%eries Batch siDe (units per batch) Pumber of batches (a 5 b) -ost per batch 0otal tra%el e.penses acti%ity cost (c 2 !) A%# &l A10 +#' '"000"000 )00 2"000 &,.(0 &')"200 A10 +#' 9+)"000 )0'.)#, '"##+ &,.+) &'+"03(

>tep '7 0he number of batches in 8hich the tra%el e.pense shoul! ha%e been processe! 3 9+)"000 actual units 5 )00 bu!gete! units per batch 3 '"#90 batches >tep 27 0he fle.ible1bu!get amount for tra%el e.penses 3 '"#90 batches 2 &,.(0 bu!gete! cost per batch 3 &'+"3(+ 0he fle.ible bu!get %ariance can be calculate! as follo8s7 *le.ible bu!get %ariance 3 Actual costs *le.ible1bu!get costs 3 ('"##+ 2 &,.+)) ('"#90 2 &,.(0) 3 &'+"03( &'+"3(+ 3 &32# * 2. 0he fle.ible bu!get %ariances can be sub!i%i!e! into price an! efficiency %ariances.
Arice %ariance 3 2 Bu!gete! Buantity of input allo8e! for 2 actual output

Efficiency %ariance 3

Receivables Arice Variance

3 3 Efficiency %ariance3 3 Payables Arice %ariance 3 3 Efficiency %ariance3 3 Travel expenses Arice %ariance 3 3 Efficiency %ariance3 3

(&0.#00 &0.(39) 2 9+)"000 &')2"'+) (9+)"000 9+)"000) 2 &0.(39 &0 (&2.#) &2.90 ) 2 2''")0+ &'0"),) * (2''")0+ '#9"000) 2 &2.90 &()"2(2 (&,.+) &,.(0) 2 '"##+ &2#3 * ('"##+1'"#90) 2 &,.(0 &+( *

7-/:

(30 min.) Flexible b !"e#, !i*e%# 1&#e*i&l' &+! !i*e%# 1&+ <&%# *i+" l&b0* ;&*i&+%e'$ '. Variance Analysis for 0uscany >tatuary for 2009 A%# &l Re' l#' FlexibleB !"e# V&*i&+%e' Flexible B !"e# S&le'V0l 1e V&*i&+%e' S#&#i% B !"e#

(1) (,) - (1) . (/) (/) (2) - (/) . (3) (3) nits sol! ("000a 0 ("000 '"000 * )"000a b =irect materials & )9+"000 & ("000 * & (00"000 &'00"000 & )00"000c =irect manufacturing labor 9)0"000a '0"000 * 9(0"000! '(0"000 #00"000e a a *i.e! costs '"00)"000 )"000 '"000"000 0 '"000"000a 0otal costs &2")+9"000 &''"000 * &2")(0"000 &2(0"000 &2"300"000 &''"000 * &2(0"000 *le.ible1bu!get %ariance >ales1%olume %ariance &2+9"000 >tatic1bu!get %ariance
a

4i%en &'00 2 ("000 3 &(00"000 c &'00 2 )"000 3 &)00"000 ! &'(0 2 ("000 3 &9(0"000 e &'(0 2 )"000 3 &#00"000
b

2. A%# &l I+% **e! (A%# &l I+5 # ?#6$ @ A%# &l P*i%e) =irect materials &)9+"000a &)+"000 Arice %ariance A%# &l I+5 # ?#6$ @ B !"e#e! P*i%e &)+0"000b

Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # @ B !"e#e! P*i%e) &(00"000c

&(0"000 * Efficiency %ariance &("000 * *le.ible1bu!get %ariance &'"000"000e &9(0"000f

=irect manufacturing labor

&9)0"000a

&)0"000 * &+0"000 Arice %ariance Efficiency %ariance &'0"000 * *le.ible1bu!get %ariance

a

)+"000 poun!s 2 &''Mpoun! 3 &)9+"000 )+"000 poun!s 2 &'0Mpoun! 3 &)+0"000 c ("000 statues 2 '0 poun!sMstatue 2 &'0Mpoun! 3 (0"000 poun!s 2 &'0Mpoun! 3 &(00"000 ! 2)"000 poun!s 2 &3#Mpoun! 3 &9)0"000 e 2)"000 poun!s 2 &+0Mpoun! 3 &'"000"000
b

("000 statues 2 + hoursMstatue 2 &+0Mhour 3 2+"000 hours 2 &+0Mhour 3 &9(0"000

7-/1
'.

(30 min.) V&*i&+%e &+&l6'i', +0+1&+ <&%# *i+" 'e##i+"

9ightning -ar =etailing :ncome >tatement Variances *or the month en!e! June 30" 20'' S#&#i% B !"e# V&*i&+%e 2) * & 9"3,) *

-ars =etaile! $e%enue Variable -osts -osts of supplies 9abor 0otal Variable -osts -ontribution @argin *i.e! -osts /perating :ncome

B !"e# 200 & 30"000

A%# &l 22) & 39"3,)

'")00 )"(00 ,"'00 22"900 9")00 & '3"+00

2"2)0 ("000 #"2)0 3'"'2) 9")00 & 2'"(2)

,)0 +00 '"')0 #"22) * 1 & #"22) *

2. 0o compute fle.ible bu!get %ariances for re%enues an! the %ariable costs" first calculate the bu!gete! cost or re%enue per car" an! then multiply that by the actual number of cars !etaile!. >ubtract the actual re%enue or cost" an! the result is the fle.ible bu!get %ariance. *BV($e%enue) 3 3 3 3 Actual $e%enue 1 Actual number of cars (Bu!gete! re%enueMbu!gete! S cars) &39"3,) 1 22) (&30"000M200) &39"3,) 1 &33",)0 &)"(2) *a%orable

*BV(>upplies) 3 Actual >upplies e.pense 1 Actual number of cars (Bu!gete! cost of suppliesMbu!gete! S cars) 3 &2"2)0 1 22) (&'")00M200) 3 &2"2)0 1 &'"(#,.)0 3 &)(2.)0 nfa%orable *BV(9abor) 3 Actual 9abor e.pense 1 Actual number of cars (Bu!gete! cost of laborMbu!gete! S cars) 3 &("000 1 22) (&)"(00M200) 3 &("000 1 &("300 3 &300 *a%orable

0he fle.ible bu!get %ariance for fi.e! costs is the same as the static bu!get %ariance" an! eBuals &0 in this case. 0herefore" the o%erall fle.ible bu!get %ariance in income is gi%en by aggregating the %ariances compute! earlier" a!;usting for 8hether they are fa%orable or unfa%orable. 0his yiel!s7 *BV(/perating :ncome) 3 &)"(2)* (1) &)(2.)0 (L) &300* 3 &)"3(2.)0. 3. :n a!!ition to un!erstan!ing the %ariances compute! abo%e" >te%ie shoul! attempt to 6eep trac6 of the number of cars 8or6e! on by each employee" as 8ell as the number of hours actually spent on each car. :n a!!ition" >te%ie shoul! loo6 at the prices charge! for !etailing" in relation to the hours spent on each ;ob. +. 0his is ;ust a simple problem of t8o eBuations T t8o un6no8ns. 0he t8o eBuations relate to the number of cars !etaile! an! the labor costs (the 8ages pai! to the employees). U 3 number of cars !etaile! by long1term employee V 3 number of cars !etaile! by both short1term employees (combine!) Bu!get7 U L V 3 200 +0U L 20V 3 )(00 Actual7 U L V 3 22) +0U L 20V 3 (000 >ubstitution7 +0U L 20(22)1U) 3 (000 20U 3 ')00 U 3 ,) V3')0

>ubstitution7 +0U L 20(2001U) 3 )(00 20U 3 '(00 U3#0 V3'20

0herefore the long term employee is bu!gete! to !etail #0 cars" an! the ne8 employees are bu!gete! to !etail (0 cars each. Actually the long term employee !etails ,) cars (an! grosses &3"000 for the month)" an! the other t8o 8ash ,) each an! gross &'")00 apiece. ). 0he t8o short1term employees are bu!gete! to earn gross 8ages of &'+"+00 per year (if June is typical" an! less if it is a high %olume month). :f this is a part1time ;ob for them" then that is fine. :f it is full1time" an! they only get pai! for 8hat they 8ash" the e.cess capacity may be causing moti%ation problems. >te%ie nee!s to !etermine a better 8ay to compensate employees to encourage retention. 0his shoul! increase customer satisfaction" an! potentially re%enue" because longer1term employees !o a more thorough ;ob. :n a!!ition" rather than paying the same 8age per car" >te%ie might consi!er setting Buality stan!ar!s an! impro%ement goals for all of the employees.

7-/, 'a.

((0 min.) C015*eBe+'i;e ;&*i&+%e &+&l6'i', *e'50+'ibili#6 i'' e'$ Actual selling price 3 &#2.00 Bu!gete! selling price 3 &#0.00 Actual sales %olume 3 ,"2,) units >elling price %ariance 3 (Actual sales price Bu!gete! sales price) 2 Actual sales %olume 3 (&#2 &#0) 2 ,"2,) 3 &'+"))0 *a%orable =e%elopment of *le.ible Bu!get
B !"e#e! U+i# A10 +#' &#0.00 (.(0a '#.(0b '#.00c A%# &l V0l 1e ,"2,) ,"2,) ,"2,) ,"2,) Flexible B !"e# A10 +# &)#2"000 +#"0') '3)"3') '30"9)0 3'+"2#0 ''2")00 +2(",#0 &'))"220

'b.

$e%enues Variable costs =@*rames &2.20MoD. 2 3.00 oD. =@9enses &3.'0MoD. 2 (.00 oD. =irect manuf. labor &').00Mhr. 2 '.20 hrs. 0otal %ariable manufacturing costs *i.e! manufacturing costs 0otal manufacturing costs 4ross margin
a

&+9")00 5 ,")00 unitsC b&'39")00 5 ,")00 unitsC c&'3)"000 5 ,")00 units

nits sol! $e%enues Variable costs =@*rames =@9enses =irect manuf. labor 0otal %ariable costs *i.e! manuf. costs 0otal costs 4ross margin 9e%el 2 9e%el '

A%# &l Re' l#' (1) ,"2,) &)9("))0 ))"#,2 ')0",3# '+)"3)) 3)'"9() '0#"39# +(0"3(3 & '3("'#,

FlexibleB !"e# V&*i&+%e' (,)-(1)-(/) & '+"))0 * ,"#), ')"+23 '+"+0) 3,"(#) +"'02 * 33")#3 &'9"033

Flexible B !"e# (/) ,"2,) &)#2"000 +#"0') '3)"3') '30"9)0 3'+"2#0 ''2")00 +2(",#0 &'))"220

S&le' V0l 1e V&*i&+%e (2)-(/)-(3) & '#"000 '"+#) * +"'#) * +"0)0* 9",20 * 0 9",20 * & #"2#0

S#&#i% B !"e# (3) ,")00 &(00"000 +9")00 '39")00 '3)"000 32+"000 ''2")00 +3(")00 &'(3")00

&'9"033 *le.ible1bu!get %ariance

& #"2#0 >ales1%olume %ariance

&2,"3'3 >tatic1bu!get %ariance

'c.

P*i%e &+! E<<i%ie+%6 V&*i&+%e' =@*ramesActual ounces use! 3 3.20 per unit 2 ,"2,) units 3 23"2#0 oD. Arice per oD. 3 &))"#,2 23"2#0 3 &2.+0 =@9ensesActual ounces use! 3 ,.00 per unit 2 ,"2,) units 3 )0"92) oD. Arice per oD. 3 &')0",3# )0"92) 3 &2.9( =irect 9aborActual labor hours 3 &'+)"3)) '+.#0 3 9"#2'.3 hours 9abor hours per unit 3 9"#2'.3 ,"2,) units 3 '.3) hours per unit A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ 2 A%# &l P*i%e) (1) (,"2,) 2 3.2 2 &2.+0) &))"#,2 Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # 2 B !"e#e! P*i%e) (/) (,"2,) 2 3.00 2 &2.20) &+#"0')

=irect @aterials7 *rames

A%# &l I+5 # ?#6$ 2 B !"e#e! P*i%e (,) (,"2,) 2 3.2 2 &2.20) &)'"2'(

&+"()( Arice %ariance

&3"20' Efficiency %ariance

=irect @aterials7 9enses

(,"2,) 2 ,.0 2 &2.9() &')0",3#

(,"2,) 2 ,.0 2 &3.'0) &'),"#(#

(,"2,) 2 (.00 2 &3.'0) &'3)"3')

&,"'30 * Arice %ariance

&22"))3 Efficiency %ariance

=irect @anuf. 9abor

(,"2,) 2 '.3) 2 &'+.#0) &'+)"3))

(,"2,) 2 '.3) 2 &').00) &'+,"3'9

(,"2,) 2 '.20 2 &').00) &'30"9)0

&'"9(+ * Arice %ariance

&'("3(9 Efficiency %ariance

2.

Possible explanations for the price variances are: (a) ne.pecte! outcomes from purchasing an! labor negotiations !uring the year. (b) ?igher Buality of frames an!Mor lo8er Buality of lenses purchase!. (c) >tan!ar!s set incorrectly at the start of the year. Aossible e.planations for the uniformly unfa%orable efficiency %ariances are7 (a) >ubstantially higher usage of lenses !ue to poor Buality lenses purchase! at lo8er price. (b) 9esser traine! 8or6ers hire! at lo8er rates result in higher materials usage (for both frames an! lenses)" as 8ell as lo8er le%els of labor efficiency. (c) >tan!ar!s set incorrectly at the start of the year.

7-// '.

(20 min.) P0''ible %& 'e' <0* 5*i%e &+! e<<i%ie+%6 ;&*i&+%e'

A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ 2 A%# &l P*i%e) (1) =irect @aterials7 Bottles Aesos 2"'2)"000

A%# &l I+5 # ?#6$ 2 B !"e#e! P*i%e (,) (("000"000 2 Aeso 0.3)) &2"'00"000

Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # 2 B !"e#e! P*i%e) (/) (3(0"000 2 ') 2 Aeso 0.3)) &'"#90"000

Aesos 2)"000 Arice %ariance

Aesos 2'0"000 Efficiency %ariance

=irect @anufacturing 9abor

Aesos ((+"9+0

(22"0+0 2 Aeso 29.30) &(+)",,2

Aesos '9"'(# Arice %ariance

(3(0"000 2 (2M(0) 2 Aeso 29.30) &3)'"(00

Aesos 29+"',2 Efficiency %ariance

2.

:f union organiDers are targeting our plant" it coul! suggest employee !issatisfaction 8ith our 8age an! benefits policies. =uring this time of targeting" 8e might e.pect employees to 8or6 more slo8ly an! they may be less careful 8ith the materials that they are using. 0hese tactics might be seen as helpful in either organiDing the union or in recei%ing increases in 8ages an!Mor benefits. Ne shoul! e.pect unfa%orable efficiency %ariances for both 8ages an! materials. Ne may see an unfa%orable 8age %ariance" if 8e nee! to pay o%ertime !ue to 8or6 slo8!o8ns. Ne !o" in fact" see a substantial unfa%orable materials Buantity %ariance" representing a serious o%eruse of materials. Nhile 8e may not e.pect each bottle to use e.actly ') oD. of glass" 8e !o e.pect the shrin6age to be much less than this. >imilarly" 8e see o%er #0F more hours use! than 8e e.pect to ma6e this number of bottles. 0hey are able to ma6e ;ust o%er '( bottles per hour" instea! of the stan!ar! 30 bottles per hour. :t is plausible that this 8aste T inefficiency are either cause! by" or are reflecti%e of the reasons behin! the attempt to organiDe the union at this plant.

7-/2

(3) min.) M&#e*i&l %0'# ;&*i&+%e', 'e 0< ;&*i&+%e' <0* 5e*<0*1&+%e e;&l &#i0+

'. @aterials Variances

A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ 2 A%# &l P*i%e) =irect @aterials (("000 2 &'#a) &'0#"000

A%# &l I+5 # ?#6$ 2 B !"e#e! P*i%e Aurchases sage (("000 2 &20) ()"000 2 &20) &'20"000 &'00"000

Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # 2 B !"e#e! P*i%e) ()00 2 # 2 &20) (+"000 2 &20) &#0"000

&'2"000 * Arice %ariance

a

&20"000 Efficiency %ariance

&'0#"000 5 ("000 3 &'#

2. 0he fa%orable price %ariance is !ue to the &2 !ifference (&20 1 &'#) bet8een the stan!ar! price base! on the pre%ious suppliers an! the actual price pai! through the on1line mar6etplace. 0he unfa%orable efficiency %ariance coul! be !ue to se%eral factors inclu!ing ine.perience! 8or6ers an! machine malfunctions. But the li6ely cause here is that the lo8er1price! titanium 8as lo8er Buality or less refine!" 8hich le! to more 8aste. 0he labor efficiency %ariance coul! be affecte! if the lo8er Buality titanium cause! the 8or6ers to use more time. 3. >8itching suppliers 8as not a goo! i!ea. 0he &'2"000 sa%ings in the cost of titanium 8as out8eighe! by the &20"000 e.tra material usage. :n a!!ition" the &20"000 efficiency %ariance !oes not recogniDe the total impact of the lo8er Buality titanium because" of the ("000 poun!s purchase!" only )"000 poun!s 8ere use!. :f the Buantity of materials use! in pro!uction is relati%ely the same" Better Bi6es coul! e.pect the remaining '"000 lbs to pro!uce '00 more units. At stan!ar!" '00 more units shoul! ta6e '00 2 # 3 #00 lbs. 0here coul! be an a!!itional unfa%orable efficiency %ariance of ('000 &20) &20"000 &+"000 +. 0he purchasing managerIs performance e%aluation shoul! not be base! solely on the price %ariance. 0he short1run re!uction in purchase costs 8as more than offset by higher usage rates. ?is e%aluation shoul! be base! on the total costs of the company as a 8hole. :n a!!ition" the pro!uction managerIs performance e%aluation shoul! not be base! solely on the efficiency %ariances. :n this case" the pro!uction manager 8as not responsible for the purchase of the lo8er1Buality titanium" 8hich le! to the unfa%orable efficiency scores. :n general" it is important for >tanley to un!erstan! that not all fa%orable material price %ariances are Qgoo! ne8s"R because of the negati%e effects that can arise in the pro!uction process from the purchase of inferior inputs. 0hey can lea! to unfa%orable ('00 2 # 2 &20) &'("000

efficiency %ariances for both materials an! labor. >tanley shoul! also that un!erstan! efficiency %ariances may arise for many !ifferent reasons an! she nee!s to 6no8 these reasons before e%aluating performance. ). Variances shoul! be use! to help Better Bi6es un!erstan! 8hat le! to the current set of financial results" as 8ell as ho8 to perform better in the future. 0hey are a 8ay to facilitate the continuous impro%ement efforts of the company. $ather than focusing solely on the price of titanium" >cott can balance price an! Buality in future purchase !ecisions. (. *uture problems can arise in the supply chain. >cott may nee! to go bac6 to the pre%ious suppliers. But Better Bi6esI relationship 8ith them may ha%e been !amage! an! they may no8 be selling all their a%ailable titanium to other manufacturers. 9o8er Buality bicycles coul! also affect Better Bi6esI reputation 8ith the !istributors" the bi6e shops an! customers" lea!ing to higher 8arranty claims an! customer !issatisfaction" an! !ecrease! sales in the future.

7-/3 '.

(30 min.) Di*e%# 1&+ <&%# *i+" l&b0* &+! !i*e%# 1&#e*i&l' ;&*i&+%e', 1i''i+" !&#&$ Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l I+5 # ?#6$ A%# &l O #5 # @ B !"e#e! P*i%e 2 B !"e#e! P*i%e) &3#+"000b &3(0"000c &2+"000 Efficiency %ariance

=irect mfg. labor

A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$@ A%# &l P*i%e) &3(#"000a

&'("000 * Arice %ariance

&#"000 *le.ible1bu!get %ariance

a

4i%en (or 32"000 hours 2 &''.)0Mhour) 32"000 hours 2 &'2Mhour 3 &3#+"000 c ("000 units 2 ) hoursMunit 2 &'2Mhour 3 &3(0"000
b

2. nfa%orable !irect materials efficiency %ariance of &'2")00 in!icates that more poun!s of !irect materials 8ere actually use! than the bu!gete! Buantity allo8e! for actual output. 3 &2 per poun! bu!gete! price 3 ("2)0 poun!s Bu!gete! poun!s allo8e! for the output achie%e! 3 ("000 2 20 3 '20"000 poun!s Actual poun!s of !irect materials use! 3 '20"000 L ("2)0 3 '2("2)0 poun!s 3. Actual price pai! per poun! 3 ')0"000 3 &'.9) per poun! +. A%# &l C0'#' I+% **e! (A%# &l I+5 # @ A%# &l P*i%e) &292")00a &,")00 * Arice %ariance
a b

&'2")00 efficiency %ariance

&292")00

A%# &l I+5 # @ B !"e#e! P*i%e &300"000b

4i%en ')0"000 poun!s 2 &2Mpoun! 3 &300"000

7-/6

(2030 min.) Di*e%# 1&#e*i&l' &+! 1&+ <&%# *i+" l&b0* ;&*i&+%e', '0l;i+" +9+08+'$ All gi%en items are !esignate! by an asteris6. A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ 2 A%# &l P*i%e) Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # 2 B !"e#e! P*i%e) (+"000W 2 0.)W 2 &20W) &+0"000
&2"000 *W Efficiency %ariance

A%# &l I+5 # ?#6$ 2 B !"e#e! P*i%e ('"900 2 &20W) &3#"000

=irect @anufacturing 9abor

('"900 2 &2') &39"900

&'"900 W Arice %ariance

=irect @aterials

('3"000 2 &).2)) &(#"2)0W

Aurchases ('3"000 2 &)W) &()"000

sage ('2")00 2 &)W) &(2")00

(+"000W 2 3W 2 &)W) &(0"000

&3"2)0 W Arice %ariance

&2")00 W Efficiency %ariance

'. +"000 units 2 0.) hoursMunit 3 2"000 hours 2. *le.ible bu!get Efficiency %ariance 3 &+0"000 &2"000 3 &3#"000 Actual !ir. manuf. labor hours 3 &3#"000 5 Bu!gete! price of &20Mhour 3 '"900 hours &3#"000 L Arice %ariance" &'"900 3 &39"900" the actual !irect manuf. labor cost Actual rate 3 Actual cost 5 Actual hours 3 &39"000 5 '"900 hours 3 &2'Mhour (roun!e!) >tan!ar! Bty. of !irect materials 3 +"000 units 2 3 poun!sMunit 3 '2"000 poun!s *le.ible bu!get L =ir. matls. effcy. %ar. 3 &(0"000 L &2")00 3 &(2")00 Actual Buantity of !ir. matls. use! 3 &(2")00 5 Bu!gete! price per lb 3 &(2")00 5 &)Mlb 3 '2")00 lbs Actual cost of !irect materials" &(#"2)0 Arice %ariance" &3"2)0 3 &()"000 Actual Bty. of !irect materials purchase! 3 &()"000 5 Bu!gete! price" &)Mlb 3 '3"000 lbs.

3. +. ).

(.

,. Actual !irect materials price 3 &(#"2)0 5 '3"000 lbs 3 &).2) per lb.

7-/7

(20 min.)

Di*e%# 1&#e*i&l' &+! 1&+ <&%# *i+" l&b0* ;&*i&+%e', A0 *+&l e+#*ie'$

'. =irect @aterials7 A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ @ A%# &l P*i%e) Nool (gi%en) &#"29).)0 Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # @ B !"e#e! P*i%e) 230 '2 &3.00 &#"2#0.00

A%# &l I+5 # ?#6$ @ B !"e#e! P*i%e 2"(33.)0 &3.00 &,"900.)0

&39) &3,9.)0 * Arice %ariance Efficiency %ariance &').)0 *le.ible1bu!get %ariance =irect @anufacturing 9abor7 A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ @ A%# &l P*i%e) (gi%en) &,"#'+.)0 Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # @ B !"e#e! P*i%e) 230 3.) &'0.)0 &#"+)2.)0

A%# &l I+5 # ?#6$ @ B !"e#e! P*i%e #3( &'0.)0 &#",,#.00

&9(3.)0 * &32).)0 Arice %ariance Efficiency %ariance &(3# * *le.ible1bu!get %ariance

2.

=irect @aterials Arice Variance (time of purchase 3 time of use) =irect @aterials -ontrol ,"900.)0 =irect @aterials Arice Variance 39).00 Accounts Aayable -ontrol or -ash #"29).)0

=irect @aterials Efficiency Variance Nor6 in Arocess -ontrol =irect @aterials Efficiency Variance =irect @aterials -ontrol

#"2#0.00 3,9.)0 ,"900.)0

=irect @anufacturing 9abor Variances Nor6 in Arocess -ontrol =irect @fg. 9abor Efficiency Variance =irect @fg. 9abor Arice Variance Nages Aayable or -ash

#"+)2.)0 32).)0 9(3.)0 ,"#'+.)0

3. Alausible e.planations for the abo%e %ariances inclu!e7 >hayna pai! a little bit e.tra for the 8ool" but the 8ool 8as thic6er an! allo8e! the 8or6ers to use less of it. >hayna use! more ine.perience! 8or6ers in April than she usually !oes. 0his resulte! in payment of lo8er 8ages per hour" but the ne8 8or6ers 8ere more inefficient an! too6 more hours than normal. /%erall though" the lo8er 8age rates resulte! in >haynaIs total 8age bill being significantly lo8er than e.pecte!.

7-/4
'.

(30 min.) U'e 0< 1&#e*i&l' &+! 1&+ <&%# *i+" l&b0* ;&*i&+%e' <0* be+%B1&*9i+".
nit %ariable cost (!ollars) an! component percentages for each firm7

Fi*1 A =@ =9 V/? 0otal

2.

Fi*1 B &'0.,3 2).2F ',.0) +0.0F

Fi*1 C &'0.,) 3(.+F

Fi*1 D &''.2) 32.3F '+.03 +0.3F 9.)( 2,.+F &3+.#+ '00.0F

&'0.00 3).,F ''.2) +0.2F

(.,) 2+.'F '+.#) 3+.#F &2#.00 '00.0F &+2.(3 '00.0F

'2.#0 +3.3F (.0 0 20.3F &29.)) '00.0F

Variances an! percentage o%erMun!er stan!ar! for each firm relati%e to *irm A7

Fi*1 B > 0;e* V&*i&+%e '#&+!&*! =@ Arice Variance =@ Efficiency Variance =9 Arice Variance =9 Efficiency Variance 0.9# 0.2) * 0.)) ).2) '0.0F 12.)F 3.3F +(.,F

Fi*1 C > 0;e* V&*i&+%e '#&+!&*! 1 1 0.,) 0.#0 0.,) 0.0F ,.)F (.,F (.,F

Fi*1 D > 0;e* V&*i&+%e '#&+!&*! '.2) * 2.)0 '.2# '.)0 1'0.0F 2).0F '0.0F '3.3F

0o illustrate these calculations" consi!er the =@ Arice Variance for *irm B. 0his is compute! as7 3 3 A%# &l I+5 # ? &+#i#6 @ (A%# &l I+5 # P*i%e . P*i%e 5&i! b6 Fi*1 A) '.9) oD. @ (&).)0 1 &).00) &0.9#

0he F o%er stan!ar! is ;ust the percentage !ifference in prices relati%e to *irm A. Again using the =@ Arice Variance calculation for *irm B" the F o%er stan!ar! is gi%en by7 3 3 (A%# &l I+5 # P*i%e . P*i%e 5&i! b6 Fi*1 A)CP*i%e 5&i! b6 Fi*1 A (&).)0 1 &).00)M&).00 '0F o%er stan!ar!.

3. 0o7 Boss *rom7 Junior Accountant $e7 Benchmar6ing T pro!ucti%ity impro%ements =ate7 /ctober ')" 20'0 Benchmar6ing a!%antages 1 8e can see ho8 pro!ucti%e 8e are relati%e to our competition 1 8e can see the specific areas in 8hich there may be opportunities for us to re!uce costs Benchmar6ing !isa!%antages 1 some of our competitors are targeting the mar6et for high1en! an! custom1ma!e lenses. :Xm not sure that loo6ing at their costs helps 8ith un!erstan!ing ours better 1 8e may focus too much on cost !ifferentials an! not enough on !ifferentiating oursel%es" maintaining our competiti%e a!%antages" an! gro8ing our margins Areas to !iscuss 1 8e may 8ant to fin! out 8hether 8e can get the same lo8er price for glass as *irm = 1 can 8e use *irm BIs materials efficiency an! *irm -Is %ariable o%erhea! consumption le%els as our stan!ar!s for the coming yearK

7-/7

((0 min.) C015*eBe+'i;e ;&*i&+%e &+&l6'i' *e;ie8.

A%# &l Re' l#' nits sol! (90F 2 2"000"000) >elling price per unit $e%enues ('"#00"000 2 &+.#0) =irect materials purchase! an! use!7 =irect materials per unit 0otal !irect materials cost ('"#00"000 2 &0.#0) =irect manufacturing labor7 Actual manufacturing rate per hour 9abor pro!ucti%ity per hour in units @anufacturing labor1hours of input ('"#00"000 5 2)0) 0otal !irect manufacturing labor costs (,"200 2 &')) =irect mar6eting costs7 =irect mar6eting cost per unit 0otal !irect mar6eting costs ('"#00"000 2 &0.30) *i.e! costs (&#)0"000 &30"000) S#&#i% B !"e#e! A10 +#' nits sol! >elling price per unit $e%enues (2"000"000 2 &).00) =irect materials purchase! an! use!7 =irect materials per unit 0otal !irect materials costs (2"000"000 2 &0.#)) =irect manufacturing labor7 =irect manufacturing rate per hour 9abor pro!ucti%ity per hour in units @anufacturing labor1hours of input (2"000"000 5 300) 0otal !irect manufacturing labor cost (("((, 2 &').00) =irect mar6eting costs7 =irect mar6eting cost per unit 0otal !irect mar6eting cost (2"000"000 2 &0.30) *i.e! costs '"#00"000 &+.#0 &#"(+0"000 &0.#0 &'"++0"000 &') 2)0 ,"200 &'0#"000 &0.30 &)+0"000 &#20"000 2"000"000 &).00 &'0"000"000 &0.#) &'",00"000 &').00 300 ("((, &'00"000 &0.30 &(00"000 &#)0"000 S#&#i%-B !"e# A10 +#' &'0"000"000 '",00"000 '00"000 (00"000 2"+00"000 ,"(00"000 #)0"000 &(",)0"000

'. $e%enues Variable costs =irect materials =irect manufacturing labor =irect mar6eting costs 0otal %ariable costs -ontribution margin *i.e! costs /perating income 2. Actual operating income >tatic1bu!get operating income 0otal static1bu!get %ariance

A%# &l Re' l#' &#"(+0"000 '"++0"000 '0#"000 )+0"000 2"0##"000 ("))2"000 #20"000 &)",32"000 &)",32"000 (",)0"000 &'"0'#"000

*le.ible1bu!get1base! %ariance analysis for >onnet" :nc. for @arch 20'0

A%# &l Re' l#' nits (!is6ettes) sol! $e%enues Variable costs =irect materials =irect manuf. labor =irect mar6eting costs 0otal %ariable costs -ontribution margin *i.e! costs /perating income '"#00"000 &#"(+0"000 '"++0"000 '0#"000 )+0"000 2"0##"000 ("))2"000 #20"000 &)",32"000 Flexible-B !"e# V&*i&+%e' 0 &3(0"000 90"000 * '#"000 0 ,2"000 * 2##"000 30"000 * &2)#"000 Flexible B !"e# '"#00"000 &9"000"000 '")30"000 90"000 )+0"000 2"'(0"000 ("#+0"000 #)0"000 &)"990"000 &'"0'#"000 0otal static1bu!get %ariance &2)#"000 0otal fle.ible1bu!get %ariance &,(0"000 0otal sales1%olume %ariance S&le'V0l 1e V&*i&+%e' 200"000 &'"000"000 ',0"000 * '0"000 * (0"000 * 2+0"000 * ,(0"000 0 & ,(0"000 S#&#i% B !"e# 2"000"000 &'0"000"00 0 '",00"000 '00"000 (00"000 2"+00"000 ,"(00"000 #)0"000 &(",)0"000

3. +. ).

*le.ible1bu!get operating income 3 &)"990"000. *le.ible1bu!get %ariance for operating income 3 &2)#"000 . >ales1%olume %ariance for operating income 3 &,(0"000 .
Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # 2 B !"e#e! P*i%e) (W("000 2 &').00) &90"000

Analysis of !irect mfg. labor fle.ible1bu!get %ariance for >onnet" :nc. for @arch 20'0
A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ 2 A%# &l P*i%e) (,"200 2 &').00) &'0#"000

=irect. @fg. 9abor

A%# &l I+5 # ?#6$ 2 B !"e#e! P*i%e (,"200 2 &').00) &'0#"000

&0 Arice %ariance

&'#"000 Efficiency %ariance

&'#"000 *le.ible1bu!get %ariance

W '"#00"000 units 5 300 !irect manufacturing labor stan!ar! pro!ucti%ity rate per hour.

(.

=@9 price %ariance 3 &0C =@9 efficiency %ariance 3 &'#"000

,.

=@9 fle.ible1bu!get %ariance 3 &'#"000

7-2:

(2) min.) C015*eBe+'i;e ;&*i&+%e &+&l6'i'$

'. Variance Analysis for >ol Electronics for the secon! Buarter of 2009
Se%0+!? &*#e* ,::7 A%# &l' (1) +"#00 & ,'.)0 &3+3"200 ),"(00 30"2+0 +,"2#0 '3)"'20 20#"0#0 (#"+00 &'39"(#0 Flexible B !"e# V&*i&+%e (,) - (1) . (/) 0 &,"200 2")92 '"++0 ,20 '"#,2 9"0,2 +00 &#"(,2 * * * * * * Flexible B !"e# <0* Se%0+! ? &*#e* (/) +"#00 & ,0.00 &33("000 (0"'92 a 2#"#00 b +#"000 c '3("992 '99"00# (#"000 &'3'"00# S&le' V0l 1e V&*i&+%e (2) - (/) . (3) #00 * &)("000 '0"032 +"#00 #"000 22"#32 33"'(# 0 &33"'(# *

nits >elling price >ales Variable costs =irect materials =irect manuf. labor /ther %ariable costs 0otal %ariable costs -ontribution margin *i.e! costs /perating income
a b

S#&#i% B !"e# (3) +"000 & ,0.00 &2#0"00 0 )0"'(0 2+"000 +0"000 ''+"'(0 '()"#+0 (#"000 &9,"#+0

* *

+"#00 units 2.2 lbs. per unit &).,0 per lb. 3 &(0"'92 +"#00 units 0.) hrs. per unit &'2 per hr. 3 &2#"#00 c +"#00 units &'0 per unit 3 &+#"000

=irect materials =irect manuf. labor (=@9)

a b

Se%0+!? &*#e* ,::7 A%# &l' &),"(00 30"2+0

A%# &l I+5 # ?#6$ P*i%e V&*i&+%e &2"##0 +"320 B !"e#e! P*i%e &)+",20 a 2)"920 b

E<<i%ie+%6 V&*i&+%e &)"+,2 * 2"##0 *

Flexible B !"e# <0* Se%0+! ? &*#e* &(0"'92 2#"#00

+"#00 units 2 lbs. per unit &).,0 per lb. 3 &)+",20 +"#00 units 0.+) =@9 hours per unit &'2 per =@9 hour 3 &2)"920

2. %ariance7

0he follo8ing !etails" re%eale! in the %ariance analysis" shoul! be use! to rebut the union if it focuses on the fa%orable operating income @ost of the static bu!get operating income %ariance of &+'"#+0* (&'39"(#0 &9,"#+0) comes from a fa%orable sales %olume %ariance" 8hich only arose because >ol sol! more units than planne!. /f the &#"(,2 * fle.ible1bu!get %ariance in operating income" most of it comes from the &,"200* fle.ible1bu!get %ariance in sales. 0he net fle.ible1bu!get %ariance in total %ariable costs of &'"#,2 * is small" an! it arises from !irect materials an! other %ariable costs" not from labor. =irect manufacturing labor fle.ible1bu!get %ariance is &'"++0 . 0he !irect manufacturing labor price %ariance" &+"320 " 8hich is large an! unfa%orable" is in!ee! offset by !irect manufacturing laborIs fa%orable efficiency %arianceEbut the efficiency %ariance is !ri%en by the fact that >ol is using ne8" more e.pensi%e materials. >ha8 may ha%e to Qpro%eR this to the union 8hich 8ill insist that itIs because 8or6ers are 8or6ing smarter. E%en if 8or6ers are 8or6ing smarter" the fa%orable !irect manufacturing labor efficiency %ariance of &2"##0 !oes not offset the unfa%orable !irect manufacturing labor price %ariance of &+"320.

3. -hanging the stan!ar!s may ma6e them more realistic" ma6ing it easier to negotiate 8ith the union. But the union 8ill resist any tightening of labor stan!ar!s" an! it may be too early (is one BuarterIs e.perience enough to change onK)C a change of stan!ar!s at this point may be %ie8e! as opportunistic by the union. Aerhaps a continuous impro%ement program to change the stan!ar!s 8ill be more palatable to the union an! 8ill achie%e the same result o%er a some8hat longer perio! of time.

7-21 '.

(30 min.) C015*eBe+'i;e ;&*i&+%e &+&l6'i'$ -omputing unit selling prices an! unit costs of inputs7 Actual selling price 3 &'",,,")00 5 22)"000 3 &,.90 Bu!geting selling price 3 &'"(00"000 5 200"000 3 &#.00 3 2 3 (&,.90Munit &#.00Munit) 3 &22")00

2 22)"000 units

2." 3." an! +. 0he actual an! bu!gete! unit costs are7 A%# &l =irect materials -ream Vanilla E.tract -herry =irect manufacturing labor Areparing >tirring &0.02 (&+(")00 5 2"32)"000) 0.20 (&2(("000 5 '"330"000) 0.)0 (&'20"000 5 2+0"000) '+.+0 (&)+"000 5 22)"000) 2 (0 '#.00 (&'20"000 5 +00"000) 2 (0 B !"e#e! &0.02 0.') 0.)0 '+.+0 '#.00

0he actual output achie%e! is 22)"000 poun!s of -herry >tar.

0he !irect cost price an! efficiency %ariances are7

A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ 2 A%# &l P*i%e) (1) =irect materials -ream Vanilla E.tract -herry & +(")00 2(("000 '20"000 &+32")00 A%# &l I+5 # ?#6$ 2 B !"e#e! P*i%e (/) & +(")00a '99")00b '20"000c &3(("000 & )+"000! '20"000e &',+"000
f g

P*i%e V&*i&+%e (,)-(1).(/) & 0 ((")00 0 & ((")00 & & 0 0 0

E<<i%ie+%6 V&*i&+%e (2)-(/).(3) & '")00 30",)0 ,")00 &39",)0 & 0 ')"000 * &')"000 *

Flex$ B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # 2 B !"e#e! P*i%e) (3) & +)"000f '(#",)0g ''2")00h &32("2)0 & )+"000i '3)"000; &'#9"000

=irect manuf. labor costs Areparing & )+"000 >tirring '20"000 &',+"000
a b

&0.02 2 2"32)"000 3 &+(")00 &0.') 2 '"330"000 3 &'99")00 c &0.)0 2 2+0"000 3 &'20"000 ! &'+.+0Mhr. 2 (22)"000 min. 5 (0 min.Mhr.) 3 &)+"000 e &'#.00Mhr. 2 (+00"000 min. 5 (0 min.Mhr.) 3 &'20"000

&0.02 2 '0 2 22)"000 3 &+)"000 &0.') 2 ) 2 22)"000 3 &'(#",)0 h &0.)0 2 ' 2 22)"000 3 &''2")00 i &'+.+0 2 (22)"000 (0) 3 &)+"000 ; &'#.00 2 (22)"000 30) 3 &'3)"000

-omments on the %ariances inclu!e >elling price %ariance. 0his may arise from a proacti%e !ecision to re!uce price to e.pan! mar6et share or from a reaction to a price re!uction by a competitor. :t coul! also arise from unplanne! price !iscounting by salespeople. @aterial price %ariance. 0he &0.0) increase in the price per ounce of %anilla e.tract coul! arise from uncontrollable mar6et factors or from poor contract negotiations by :celan!. @aterial efficiency %ariance. *or all three material inputs" usage is greater than bu!gete!. Aossible reasons inclu!e lo8er Buality inputs" use of lo8er Buality 8or6ers" an! the preparing an! stirring eBuipment not being maintaine! in a fully operational mo!e. 0he higher price per ounce of %anilla e.tract (an! perhaps higher Buality of %anilla e.tract) !i! not re!uce the Buantity of %anilla e.tract use! to pro!uce actual output. 9abor efficiency %ariance. 0he fa%orable efficiency %ariance for stirring coul! be !ue to 8or6ers eliminating non%alue1a!!e! steps in pro!uction.

7-2, (20 min.) V&*i&+%e &+&l6'i' 8i#B &%#i;i#6-b&'e! %0'#i+" &+! b&#%B-le;el !i*e%# %0'#' '. *le.ible bu!get %ariances for batch acti%ities
Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # 2 B !"e#e! P*i%e) ')" 000 8 &10.75 '00 &'2"900

Se# 5

A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ 2 A%# &l P*i%e) ')" 000 7 &12.00 ,) &'("#00

A%# &l I+5 # ?#6$ 2 B !"e#e! P*i%e ')" 000 7 &10.75 ,) &')"0)0

&'",)0 Arice %ariance

&2"')0 Efficiency %ariance

&3"900 *le.ible1bu!get %ariance

? &li#6 I+'5e%#i0+

A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ 2 A%# &l P*i%e) ')" 000 9 &15.50 '00 &20"92)

A%# &l I+5 # ?#6$ 2 B !"e#e! P*i%e ')" 000 9 &17.50 '00 &23"(2)

Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # 2 B !"e#e! P*i%e) ')" 000 10 &17.50 '20 &2'"#,)

&2",00 * Arice %ariance

&'",)0 Efficiency %ariance

&9)0 * *le.ible1bu!get %ariance

2. $e7 E.planation of Variances Belo8 : e.plain the implications of the %ariances that : calculate!. : 8oul! en;oy meeting 8ith you to !iscuss 8hether 8e are follo8ing the most efficient policies" gi%en these calculations. Alease let me 6no8 if there is any 8ay to impro%e my 8or6 or my presentation to you. '. /ur batch siDes for both setups an! Buality inspection 8ere smaller than planne!. E%en though 8e 8ere able to re!uce the setup an! Buality inspection time nee!e! for each batch (because of the smaller batch siDes)" these gains 8ere more than offset by the increase! number of batches. /%erall" 8e en!e! up substantially belo8 the le%el of efficiency at 8hich 8e 8ishe! to operate. 2. 0he hourly 8age for the setup 8or6ers 8ent o%er bu!get !ue to the tight labor mar6et in our area for such employees. ?o8e%er" 8e sa%e! a consi!erable amount of money because 8e 8ere able to negotiate re!uce! 8age rates for the Buality inspection labor after the e.piration of their pre%ious contract. /%erall" gi%en our output le%el of ')"000 eels" 8e ha! a mo!erately fa%orable %ariance for Buality inspection costs" an! a significant unfa%orable %ariance on setups" for the reasons outline! abo%e. 0han6 you. 7-2/ (30 min.) P*i%e &+! e<<i%ie+%6 ;&*i&+%e', 5*0ble1' i+ '#&+!&*!-'e##i+", be+%B1&*9i+"$

'. Bu!gete! !irect materials input per shirt 3 (00 rolls 5 ("000 shirts3 0.'0 roll of cloth Bu!gete! !irect manufacturing. labor1hours per shirt ('")00 hours 5 ("000 shirts) 3 0.2) hours Bu!gete! !irect materials cost (&30"000 5 (00) 3 &)0 per roll Bu!gete! !irect manufacturing labor cost per hour (&2,"000 5 '")00) 3 &'# per hour Actual output achie%e! 3 (",32 shirts
A%# &l C0'#' I+% **e! (A%# &l I+5 # ?#6$ @ A%# &l P*i%e) =irect @aterials &30"29+ Flexible B !"e# (B !"e#e! I+5 # ?#6$ All08e! <0* A%# &l O #5 # @ B !"e#e! P*i%e) ((",32 2 0.'0 2 &)0) &33"((0

A%# &l I+5 # ?#6$ @ B !"e#e! P*i%e (('2 2 &)0) &30"(00

&30( * Arice %ariance =irect @anufacturing 9abor ('")30 2 &'#) &2,")+0 &')3 Arice %ariance

&3"0(0 * Efficiency %ariance ((",32 2 0.2) 2 &'#) &30"29+ &2",)+ * Efficiency %ariance

&2,"(93

2. Actions employees may ha%e ta6en inclu!e7 (a) A!!ing steps that are not necessary in 8or6ing on a shirt. (b) 0a6ing more time on each step than is necessary. (c) -reating problem situations so that the bu!gete! amount of a%erage !o8ntime 8ill be o%erstate!. (!) -reating !efects in shirts so that the bu!gete! amount of a%erage re8or6 8ill be o%erstate!. Employees may ta6e these actions for se%eral possible reasons. (a) 0hey may be pai! on a piece1rate basis 8ith incenti%es for pro!uction le%els abo%e bu!get. (b) 0hey may 8ant to create a rela.e! 8or6 atmosphere" an! a less !eman!ing stan!ar! can re!uce stress. (c) 0hey ha%e a Qthem %s. usR mentality rather than a partnership perspecti%e. (!) 0hey may 8ant to gain all the benefits that ensue from superior performance (;ob security" 8age rate increases) 8ithout putting in the e.tra effort reBuire!. 0his beha%ior is unethical if it is !eliberately !esigne! to un!ermine the cre!ibility of the stan!ar!s use! at Pe8 *ashions. 3. :f Jorgenson !oes nothing about stan!ar! costs" his beha%ior 8ill %iolate the Q>tan!ar!s of Ethical -on!uct for Aractitioners of @anagement Accounting.R :n particular" he 8oul! %iolate the (a) stan!ar!s of competence" by not performing professional !uties in accor!ance 8ith rele%ant stan!ar!sC (b) stan!ar!s of integrity" by passi%ely sub%erting the attainment of the organiDationIs ob;ecti%e to control costsC an! (c) stan!ar!s of cre!ibility" by not communicating information fairly an! not !isclosing all rele%ant cost information. Jorgenson shoul! !iscuss the situation 8ith *enton an! point out that the stan!ar!s are la. an! that this practice is unethical. :f *enton !oes not agree to change" Jorgenson shoul! escalate the issue up the hierarchy in or!er to effect change. :f organiDational change is not forthcoming" Jorgenson shoul! be prepare! to resign rather than compromise his professional ethics. @ain pros of using Benchmar6ing -learing ?ouse information to compute %ariances are7 (a) ?ighlights to Pe8 *ashions in a !irect 8ay ho8 it may or may not be cost1 competiti%e. (b) Aro%i!es a Qreality chec6R to many internal positions about efficiency or effecti%eness. @ain cons are7 (a) Pe8 *ashions may not be comparable to companies in the !atabase. (b) -ost !ata about other companies may not be reliable. (c) -ost of Benchmar6ing -learing ?ouse reports.

+.

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