Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-30 Flexible Budget and Operating-Income Variances (40 minutes)
1. Budget data:
a. Flexible budget for 20,000 units
Sales 20,000 × $4.50 = $90,000
Variable costs 20,000 × $1.70 = 34,000
b. Contribution margin earned for the period:
$85,000 − $32,000 = $53,000
c. Operating income flexible-budget variance = actual operating
d. Sales volume variance, in terms of contribution margin = flexible budget CM –
e. Sales volume variance, in terms of operating income = flexible budget
operating income – master budget operating income
The following summary, similar to text Exhibit 14.4, may be helpful for in-class
presentation purposes:
Flexible- Sales Master
Budget Flexible Volume (Static)
Actual Variance Budget Variance Budget
Unit sales 20 ,000 -0 – 20 ,000 2 ,000F 18 ,000
Sales $85,000 $5,000U
$90,000 $9,000F $81,000
Variable costs 32 ,000 2 ,000 F
34,000 $3 ,400 U 30 ,600
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Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
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Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-30 (Continued)
2. As long as both the budgeted and the actual operations are within the “relevant
range,” the flexible budget for the actual operating level and the master budget
3. The actual fixed costs for a period are likely to differ from the budgeted amount.
As a result, the contribution margin flexible-budget variance is likely to differ from
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Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-31 Applicability of Standard Cost Systems (30-40 minutes)
1. The major advantages of using a standard cost accounting system include the
following:
Budgeting. Standard costs can be the building blocks for budget preparations
and allow the development of flexible budgets.
Performance evaluation. By comparing actual costs to standard costs, the
costs per equivalent unit (i.e., these costs do not have to be calculated
separately using FIFO or the weighted-average method).
2. The setting of physical standards such as materials quantities, labor hours, machine
time, and set-up time generally requires information about materials, laborers,
equipment specifications, production procedures, and work flow; this information is
3. a. Because cash-maximization is important for a product classified as a cash cow,
efficiency of operations is essential. Standard costs provide targets for monitoring
b. Because a product classified as a question mark is facing strong competition, the
ability to control product costs may be the difference between success and
failure. The efficiency gained from the application and monitoring of a standard
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Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-31 (Continued)
4. In an advanced manufacturing environment, characterized by the increased use of
technology in the manufacturing process and the existence of world-class
competitors, several important criticisms of standard cost systems have been raised
in the literature, including:
The use of such standards, as defined and used conventionally, does not
motivate continuous improvement (Kaizen), which could put the organization at a
enough (i.e., do not include the “cost of total ownership”).
Many highly-automated manufacturing processes, based on advanced
manufacturing technologies, are highly reliable and consistent; in this case, the
incremental information to management from standard-cost variances can be
small.
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Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-32 Determining Standard Direct Materials Cost (15 minutes)
Standard direct material cost per bag of Insect-Be-Gone
Total direct materials per unit of output = 60 lbs.
Divided by: Proportion of direct materials inputs remaining
in one unit of finished product = (1 − evaporation rate) = 75%
Total standard quantity of DM inputs/unit of output 80 lbs.
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Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-33 Ethical Considerations (25 minutes)
1. The IMA Statement of Ethical Professional Practice provides a set of four overarching
principles designed to guide member behavior. As well, there is an expectation that
IMA members “encourage others within their organization to adhere to the principles
of honesty, fairness, objectivity, and responsibility.”
In the present case, however, we focus on the ethical standards related to the
behavior of the Purchasing Manager:
Competence: the “reporting” of sub-standard purchase prices for raw materials
(represented by sub-standard materials) violates the expectation that decision-
understanding of any resulting reports or analyses, such as the standard cost
variance information related to the purchasing transaction.
2. The IMA Standards of Ethical Professional Practice indicate that in resolving ethical
conflicts the accountant should first act in accordance with the organization’s
established policies regarding the resolution of such conflicts. If this step does not
resolve the issue, the accountant should then discuss the issue with his/her
immediate supervisor, which in this case could be the controller of the organization.
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Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-34 Standard Costs and Ethics (15 Minutes)
As controller of the company, Mary’s behavior is not ethical. Under the Credibility
standard, Mary has an obligation to communicate information fairly and objectively.
Further, under the Credibility standard she has a responsibility to prepare complete
and clear reports and recommendations. That is, she must disclose the price
information since this information could reasonably be expected to influence the
owner’s decision-making.
(e.g., by mandating that apple juice must be purchased from her friend’s business).
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Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-35 Financial versus Operational Control; Behavioral Considerations in the
Standard-Setting Process (20 minutes)
As indicated in the text, we use the term “management accounting and control
system” to refer to the entire set of procedures and systems used by an organization
to monitor activities and guide actions in support of the overall goals and objectives
of the organization. As such, a comprehensive management accounting and control
system contains both a planning component (e.g., operational and financial budgets
covered in Chapter 10) and a feedback/assessment component (covered in Part
Four of the text).
goals. The goal of the latter system is to monitor nonfinancial performance indicators
associated with the operating factors considered critical to the organization for
achieving a competitive advantage.
One dimension of a financial control system is the use of flexible-budgets, standard
costs, and variance analysis—covered in Chapters 14, 15, and 16 of the text. In
variable costs can be decomposed into a price variance component and an
efficiency (quantity) variance component.
No management accounting and control system is good or bad per se. Each is
judged, at least conceptually, by comparing costs and benefits. Among the more
important considerations are behavioral considerations. For example, one
Education.
Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-36 Journal Entries (15 minutes)
Oct. 7 Materials Inventory (720 lbs. × $40/lb.) 28,800
Materials Purchase-Price Variance—PVC (720 lbs. × $1/lb.) 720
Accounts Payable (720 lbs. × $41/lb.) 29,520
Purchased 720 pounds of PVC at $41/lb.; standard price = $40/lb.
Oct. 9 Work-in-Process Inventory (780 units × $40/unit) 31,200
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