Chapter 23 – Flexible Budgets and Standard Costs
Problem 23-4B (50 minutes)
Part 1 Direct Materials Variances
Direct materials cost variances
Actual units at actual cost [1,000,000 lbs. @ $4.25]…………………………..……..….$4,250,000
Standard units at standard cost [1,050,000 lbs. @ $4.00]………………..…..……… 4,200,000
Direct material cost variance……………………..………..……….………..……………..…...$ 50,000 U
Direct Materials Price and Quantity Variances
Actual Cost
AQ x AP AQ x SP
Standard Cost
SQ x SP
1,000,000 x $4.25 1,000,000 x $4.00 1,050,000 x $4.00
$4,250,000 $4,000,000 $4,200,000
Part 2 Direct Labor Variances
Direct labor cost variances
Actual units at actual cost [250,000 hrs. @ $7.75]………………….…..…..………..…$1,937,500
Standard units at standard cost [252,000 hrs. @ $8.00]………..………..…..…..….. 2,016,000
Direct labor cost variance……………………..……….………..………..……….…….………..$ 78,500 F
Direct Labor Rate and Efficiency Variances
Actual Cost
AH x AR AH x SR
Standard Cost
SH x SR
$78,500 F
(Total labor variance)
Problem 23-4B (Continued)
Part 3 Overhead Variances
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Chapter 23 – Flexible Budgets and Standard Costs
Overhead controllable variance
Actual overhead incurred [$1,960,000 + $1,200,000].…..….......$ 3,160,000
Budgeted overhead [from flexible budget]………………………….. 3,276,000
Fixed overhead cost variance……..…………….....…..…..…....…....$ 252,000 U
Problem 23-5BA (15 minutes)
(a) Variable Overhead Spending and Efficiency Variances
Actual Overhead
AH x AVR AH x SVR
Applied Overhead
SH x SVR
250,000 x $5 252,000 x $5
(b) Fixed Overhead Spending and Volume Variances
Actual Overhead Budgeted Overhead Applied Overhead
252,000 x $7
$1,960,000 $2,016,000 $1,764,000
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Chapter 23 – Flexible Budgets and Standard Costs
(c) Controllable variance
Variable overhead spending variance……………………………... $ 50,000 F
Problem 23-6BA (45 minutes)
Part 1
June 30* Work in Process Inventory…………………………………….………..130,000
Direct Materials Quantity Variance…………………….……. 5,000
June 30 Work in Process Inventory……………………………….……….…….67,500
Direct Labor Rate Variance………………………………………………500
Direct Labor Efficiency Variance……………….……….…… 3,000
Factory Payroll Payable…………………………………….…….65,000
To record direct labor costs, including
the favorable efficiency variance and
unfavorable rate variance.
June 30 Work in Process Inventory……………………………….……….…….230,000
Controllable Variance………………………………………………………8,000
* Alternatively, some companies compute and record the price variance
when materials are purchased. This would yield two separate entries:
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Chapter 23 – Flexible Budgets and Standard Costs
(1) Purchase of materials
Raw Materials Inventory…………………………………………………….…………..125,000
Direct Materials Price Variance………………………………………………….1,500
Accounts Payable…………………………………………………..….…………….123,500
Raw Materials Inventory……………………………………………….…………..125,000
Problem 23-6BA (Concluded)
Part 2
Under management by exception, the manager would first identify the largest
variances, attempt to uncover their causes, and then implement actions aimed
at correcting them. The smaller variances would be tackled after the major
problems were dealt with, if at all.
The largest variance amounts occur for the materials quantity variance, the
materials price variance, the direct labor efficiency variance, and the volume
and controllable overhead variances. The manager should go to the
purchasing department to determine why materials were acquired at a lower
price, and to the production department to find out why the process used less
materials and less labor hours than expected. The controllable variance would
need to be broken down into its components for individual cost items to see
which ones deviated most from expected results.* Based on these findings,
lower-level managers would be called on to explain what happened.
After the relatively larger amounts are explained and actions taken, the
manager can seek explanations of the less significant direct labor rate
variance from the personnel department.
* The unfavorable volume variance indicates that the company produced fewer items
than expected. Managers would need to determine whether this was because of
declining sales, idle time, breakdowns, or other reasons.
SERIAL PROBLEM — SP 23
Serial Problem, Business Solutions (30 minutes)
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Chapter 23 – Flexible Budgets and Standard Costs
Flexible Budget Performance Report
For Quarter Ended June 30
Flexible Actual
Budget Results Variances
Desk sales (150 units)…………………………..$187,500 $186,000 $1,500 U
Chair sales (80 units)………………..……….…
Variable expenses…………………….….………
40,000
132,500
41,200
132,880
1,200
380
F
U
Supporting computations
Total budgeted desk sales……………………………………….…………$180,000
Total units budgeted………………………………………………………….. 144
Budgeted selling price…………………………………………….…………$1,250 per unit
Flexible budget units…………………………………………………………. 150
Flexible budget sales………………………………………….……………..$187,500
Total budgeted chair sales………………………………………………….$ 36,000
Flexible budget units…………………………………………………………. 150
Flexible budget variable expenses for desks……………………….$112,500
Serial Problem, Business Solutions (concluded)
Total budgeted variable costs for chairs…………………..…..…....$18,000
Total units budgeted………………………………………………………….. 72
Budgeted variable expenses per chair…………..………..…..…..… $250
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Chapter 23 – Flexible Budgets and Standard Costs
Total actual expenses…………………………………………………………$163,880
Actual fixed expenses…………………………………………………..…… 31,000
Actual variable expenses………………………………………………..….$132,880
Reporting in Action — BTN 23-1
1. For foreign subsidiaries that do not use the U.S. dollar as their functional
currency, Apple reports the annual adjustment (“translation gains and
losses”) as a component of Accumulated Other Comprehensive Income
(AOCI) in the shareholders’ equity section of its consolidated balance
sheet.
2. a. As reported in its footnote, the assets and liabilities of foreign
subsidiaries (e.g. cash) are translated at exchange rates in effect at the
balance sheet date.
equipment) are translated at exchange rates in effect at the balance sheet
date.
Comparative Analysis — BTN 23-2
1. Apple and Google sales figures for the most recent 3 years—data
available from Appendix A—are shown below ($ millions):
One
Two Years
45% incr. 9% incr.
Google $37,905 $50,175 $59,825 _______ _______
32% incr. 19% incr.
2. Predictions will vary among students. Generally, predictions should
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Chapter 23 – Flexible Budgets and Standard Costs
increased in each of the past two years and the rate of increase was lower
in the most recent year. Students may project that Apple’s and Google’s
sales will increase slightly over the next two years.
Ethics Challenge — BTN 23-3
A typical answer might include four individuals selected from the following
specialty areas (answers will vary among students):
Specialty Information Input and Explanation
Engineer……………..…….……….Scientific support for quantity standard.
Production manager..............Actual amount or quantity used in production.
Supplier……………………….…….Identify reasonable price of inputs.
Purchasing manager…………..Identify reasonable price of inputs.
Communicating in Practice — BTN 23-4
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
Variance Cost of Goods Sold Gross Margin
Part 1. Favorable Decrease Increase
Part 2. Unfavorable Increase Decrease
variance and an increase (decrease) in gross margin and net
income.
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Chapter 23 – Flexible Budgets and Standard Costs
Taking It to the Net — BTN 23-5
1. Benchmarking is a method whereby organizations try to look to other
organizations to identify “best practices” so as to improve and attain
2. Given that a benchmark can be considered as a standard, companies
should analyze the costs associated with achieving the benchmark figure.
Firms can then compare their current cost levels with the benchmark cost
so as to identify the potential for cost savings.
Teamwork in Action — BTN 23-6
Answers will vary depending on the two industries selected. Two examples
are identified and briefly described below:
i. Overnight delivery services: 10 a.m. delivery, late-day drop-off, pick-up
service, tracking systems, fast-moving workforce.
ii. Hotel services: clean rooms, fast check-in, fast/in-room check-out, luggage
delivered to room quickly, immediate room service.
Entrepreneurial Decision — BTN 23-7
To: Chris Sugai, President
Niner Bikes
Re: Management Accounting Quote Interpretations
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Chapter 23 – Flexible Budgets and Standard Costs
Quote 1: “Variances are not explanations”
The author of this quote is emphasizing that variances are only a starting
point in controlling production operations. Management must look beyond
the variances to understand why they occurred.
Quote 2: “Management’s goal is not to minimize variances.”
The author of this quote understands that the real objective of management is
to maximize the value of the firm for the stakeholders. For example, it might
not be wise to focus solely on minimizing the direct material price variance if
such a focus would impair product quality. Usually, it is not advisable to trade
off product quality in order to reduce costs.
Hitting The Road — BTN 23-8
1. A typical cheese pizza has three main raw materials: dough, sauce, and
cheese.
2. Observe that the national chain probably follows specific measurement
3. These observations reflect an important issue for pizza businesses and for
smaller, local businesses in particular. Excess raw materials applied to
food products may not be desirable to many customers. Also, materials
Global Decision — BTN 23-9
1. Samsung’s sales figures for the most recent 2 years — data available from
its website — are shown below (₩ millions)
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13.7% incr.
2. Predictions will vary among students. Generally, predictions should reflect
both the trend in the company’s sales data and current industry and
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