ACT2131

SEMESTER 1 2012/2013

Tutorial 7

1. What is a static planning budget?

2. What is a flexible budget and how does it differ from a static planning budget?
3. What are some of the possible reasons that actual results may differ from what had been
budgeted at the beginning of a period?
4. Tiptop Flight School offers flying lessons at a small municipal airport. The schools
owner and manager has been attempting to evaluate performance and control costs
using variance report that compares the planning budget to actual results. A recent
variance report appears below:

After several months of using such variance reports, the owner has become frustrated.
For example, she is quite confident that instructor wages were very tightly controlled in
July, but the report shows unfavorable variance.
The planning budget was developed using the following formulas, where q is the number
of lessons sold:

Required:
i.
ii.
iii.

Should the owner feel frustrated with the variance reports? Explain
Prepare a flexible budget performance report for the school for the month of July
Evaluate the schools performance for July.

5. What is a quantity standard? What is a price standard?

6. Distinguish between ideal and practical standards.
7. Why are separate price and quantity variances computed?
8. Who is generally responsible for the materials price variance? The materials quantity
variance? The labor efficiency variance?
9. Becton Labs produces various chemical compounds for industrial use. One compound,
called Fludex is prepared using a distilling process. The company has developed
standard costs for one unit of Fludex, as follows:

During November, the following activity was recorded relative to production of Fludex:
a. Materials purchased, 12,000 ounces at a cost of $225,000
b. There was no beginning inventory of materials; however, at the end of the month,
2,500 ounces of material remained in ending inventory.
c. The company employs 35 lab technicians to woek in the production of Fludex.
During November, they worked an average of 160 hours at an average rate of $12
per hour
d. Variable manufacturing overhead is assigned to Fludex on the basis of direct-laborhours. Variable manufacturing overhead costs during November totaled $18,200
e. During November, 3,750 good units of Fludex were produced.

The companys management is anxious to determine the efficiency of Fludex production

activities.
Required:
1. For direct materials used in the production of Fludex:
a. Compute the price and quantity variances
b. The materials were purchased from a new supplier who is anxious to enter
into a long-term purchase contract. Would you recommend that the company
sign the contract? Explain.
2. For direct labor employed in the production of Fludex:
a. Compute the price and quantity variances
b. In the past, the 35 technicians employed in the production of Fludex
consisted of 20 senior technicians and 15 assistants. During November, the
company experimented with fewer senior technicians and more assistants in
order to save costs. Would you recommend that the new labor mix be
continued? Explain.
3. Compute the variable overhead rate and efficiency variances. What relation can you
see between this efficiency variance and the labor efficiency variance?
10.

Miley Toy Company manufactures a plastic swimming pool at its Westwood Plant. Te
plant has been experiencing problems as shown by its June contribution format income
statement below:

*contains direct materials, direct labor and manufacturing overhead.

Janet Dunn, a newly appointed general manager, has been given instructionsa to get
things under control. Upon reviewing the plants income statement, Ms Dunn has
concluded that the major problem lies in the variable cost of goods sold. She has been
provided with the following standard cost per swimming pool:

During June the plant produced 15,000 pools and incurred the following costs:
a. Purchased 60,000 pounds of materials at a cost of $1.95 per pound.
b. Used 49,200 pounds of materials in production. (finished goods and work in process
inventories are insignificant and can be ignored).
c. Worked 11,800 direct labors-hours at a cost of $7.00 per hour.
d. Incurred variable manufacturing overhead cost totalling $18,290 for the month. A
total of 5,900 machine-hours was recorded
It is the company policy to close all variances to cost of goods sold on a monthly basis.
Required:
1. Compute the following variances:
a. Direct materials price and quantity variances
b. Direct labor rate and efficiency variances
c. Variable overhead rate and efficiency variances
2. Summarize the variances that you computed in (1) above by showing the net overall
favorable or unfavorable variance for the month. What impact did this figure have on
the companys income statement? Show computations.
3. Pick out the two most significant variances that you computed in (1) above. Explain
to Ms. Dunn possible causes of these variances.