978-0077733773 Chapter 14 Solution Manual Part 5

Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial

Performance Measures

14-42 JIT and Process Cycle Time Efficiency (PCE) (45-50 minutes)

1. The terms “value-added” and “non-value-added” are defined from the perspective of

the customer (i.e., an external perspective is taken). Because the perspective is

external, the notions of “value-added” vs. “non-value-added” are not strictly or

uniquely defined. The key question in classifying activities is whether the consumer

would “pay” for the activity. This is one way to operationalize the two terms. We note

here in passing that these terms are derived from the literature of activity-based

costing (ABC). The purpose of this part of question #1 is to have students think about

the difference between an internal and an external perspective when developing

appropriate performance indicators (metrics).

With an understanding of the terms “value-added” and “non-value-added,” the

student is now in a position to understand the notion of “processing cycle efficiency

2. Cycle time is the total time required from the start of production to completion of

outputs. Process (or processing or manufacturing) time represents the time actually

required for processing. As such, process time excludes waiting time, storage time,

moving time, set-up time, and inspection time, all of which can be considered “non-

value-added” from the standpoint of the customer.

As shown in text Exhibit 14.14, we might begin by defining Customer Response

Time (CRT), as the difference between when a customer places an order and when

that order is completed), and delivery time (time between when an order is completed

and when that order is received by the customer). As shown in Exhibit 14.14, we

might further break-down manufacturing lead (cycle) time into waiting time and

manufacturing (or, production cycle) time. Finally, manufacturing time can be

decomposed into the elements reflected above in the formula for PCE.

14-41

Education.

Performance Measures

14-42 (Continued)

3. Processing Cycle Efficiency (PCE), Pre-JIT:

PCE = 1.0 hr. ÷ (1.0 hr. + 1.0 hr. + 0.50 hr. + 0.75 hr.)

Processing Cycle Efficiency (PCE), Post-JIT Implementation:

PCE = 0.50 hr. ÷ (0.50 hr. + 20/60 hr. + 15/60 hr. + 15/60 hr.)

4. Percentage Improvement, Pre-JIT versus Post-JIT Implementation:

% change = (0.3750 − 0.3077) ÷ 0.3077 = 22% (actual amount is 21.87%)

5. The move to a JIT manufacturing process should be accompanied by improvements

in quality, reductions in waste and inefficiencies, reduction in inventories held,

improvements in cycle times (and customer response time, CRT), and, perhaps,

increases in sales. These expectations suggest the following non-financial

performance indicators be monitored and reported to management by the

organization’s management accounting and control system:

Supplier-Related Measures

lead time from placement of order (for raw materials) and receipt of such

incoming inspections)

Production-Related Measures

14-42 (Continued)

14-42

Education.

Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial

Performance Measures

% capacity utilization (i.e., managing the supply of resource capacity)

actual production as % of planned production

Distribution Activities

% of items delivered with no (zero) defects

PROBLEMS

14-43 Master Budget, Flexible Budget, and Profit-Variance Analysis; Spreadsheet

Application (75-90 minutes)

1.

Flexible- Sales Master

Actual Budget Flexible Volume (Static)

Results Variances Budget Variance Budget

Unit sales 4,000 0 4,000 100F 3,900

Sales $390,000 $10,000U $400,000 $10,000F $390,000

Variable Costs:

Manufacturing $241,000 $41,000U $200,000 $5,000U $195,000

Marketing $39,000 $1,000F $40,000 $1,000U $39,000

Total Variable Costs $280,000 $40,000U $240,000 $6,000U $234,000

CM $110,000 $50,000U $160,000 $4,000F $156,000

Fixed Costs:

Manufacturing $50,000 $0 $50,000 $0 $50,000

Marketing $40,000 $4,000U $36,000 $0 $36,000

Total Fixed Costs $90,000 $4,000U $86,000 $0 $86,000

$54,000U $4,000F

2. Profit-variance components:

a. total master (static) budget variance = actual operating income  master

c. total variable cost flexible-budget variance = actual total variable costs 

Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial

Performance Measures

14-43 (Continued-1)

2. flexible-budget variance for variable nonmanufacturing costs = actual

1. flexible-budget variance for fixed manufacturing costs = actual fixed

2. flexible-budget variance for fixed nonmanufacturing costs = actual fixed

3. Interpretation of profit variances:

a. total master (static) budget variance: this is the total operating-profit variance

for the period, i.e., the difference between actual operating profit and operating

profit as stated in the master (static) budget. Notice that this variance is a function

explained below.

variance can be broken be calculating a flexible-budget variance for each

variable cost (e.g., by functional category).

1. flexible-budget variance for total variable manufacturing costs: this variance

represents the portion of the flexible-budget variance that is attributable to

14-45

Education.

Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial

Performance Measures

14-43 (Continued-2)

2. flexible-budget variance for total variable nonmanufacturing costs: this

variance represents the portion of the flexible-budget variance that is

attributable to nonmanufacturing cost per unit being different from budgeted

1. flexible-budget variance for total fixed manufacturing costs: this is the

portion of the flexible-budget variance for total fixed costs that is attributable

attributable to spending on nonmanufacturing fixed costs being different from

budgeted spending. As such, this variance can be further broken down on a

line-item basis (i.e., sales salaries, depreciation, etc.).

14-46

Education.

Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial Performance Measures

14-43 (Continued-3)

Ortiz & Co.

Master (Static) Budget Variance

(Actual Operating Income  Master Budget Operating Income)

$50,000U

Total FB-Variance Sales Volume Variance

$54,000U $4,000F

($20,000 − $74,000) ($40/unit × 100 units)

SP Variance Variable Cost Variances Fixed Cost Variances

$10,000U $40,000U $4,000U

14-47

Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and The Role of

Nonfinancial Performance Measures

14-43 (Continued-4)

Note to Instructor: An Excel file solution covering parts (1) and (2) of this assignment is

embedded below. You can open this “object” by doing the following:

1. Right click anywhere in the worksheet area below.

2. Select “worksheet object” and then select “Open.”

3. To return to the Word document, select “File” and then “Close and return

to…” while you are in the spreadsheet mode. The screen should then

return you to this Word document.

Pr. 14-43 7e.xlsx

Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and The Role of

Nonfinancial Performance Measures

14-44 Materials Purchase-Price Variance and Foreign Exchange Rates (20-30

minutes)

1. Actual Results

Actual Purchase Standard

Price

Quantity Price Total Cost Price/kg. Variance

1st Quarter 5,000 $68.00 $ 340,000 $60 $ 40,000U

2nd Quarter 5,000 69.00 345,000 60 45,000U

3rd Quarter 5,000 74.00 370,000 60 70,000U

*Total actual purchases = 40,000 kg. × $50 avg. price/kg. = $2,000,000

**$2,000,000 − ($340,000 + $345,000 + $370,000) = $945,000

***$945,000  25,000 = $37.80/kg.

Further analysis of the 4 th

Quarter’s materials purchase-price variance:

Price variance due to increase in the negotiated price:

2. The favorable materials purchase-price variance for the 4th quarter and for

the year is due to fluctuations in foreign currency exchange rates. The firm

gained $980,000 from the favorable changes in currency exchange rates.

Without the favorable exchange rate in the 4th quarter, the firm would have

14-49

Education.

Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and The Role of

Nonfinancial Performance Measures

14-45 Direct Materials: Joint Price-Quantity Variance (30-45 minutes)

1. Direct materials price variance = AQ × (AP − SP)

2. Standard direct materials allowed for the units manufactured, SQ:

3. “Pure” direct materials price variance = SQ × (AP − SP)

= 25,000 tons × ($12 − $10)/ton = $50,000U

Direct materials joint price-quantity variance = (AP − SP) × (AQ − SQ)

The preceding calculations are illustrated graphically below:

14-50

Education.