Chapter 8
Flexible Budgets, Standard Costs, and
Variance Analysis
Solutions to Questions
8-1 The planning budget is prepared for the
planned level of activity. It is static because it is
8-2 A flexible budget can be adjusted to
reflect any level of activity—including the actual
8-3 Actual results can differ from the budget
for many reasons. Very broadly speaking, the
8-4 From a manager’s perspective,
differences between the planning budget and
actual results that are due to a change in
activity are very different from variances that are
8-5 A revenue variance is the difference
between how much the revenue should have
because the revenue is less than expected for
the actual level of activity.
given the actual level of activity, and the actual
amount of the cost. Like the revenue variance,
spending variance occurs because the cost is
higher than expected for the actual level of
happened at the actual level of activity to what
actually happened. A planning budget does not
enable these comparisons because it is based on
the planned level of activity rather than the
may be a function of the second cost driver, and
some costs may be a function of both cost
8-10 Separating a spending variance into a
price variance and a quantity variance provides
8-11 The materials price variance is usually
the responsibility of the purchasing manager.
8-12 The materials price variance can be
computed either when materials are purchased
or when they are placed into production. It is
8-13 This combination of variances may
8-14 Several factors other than the
contractual rate paid to workers can cause a
labor rate variance. For example, skilled workers
8-15 If poor quality materials create
production problems, a result could be excessive
8-16 If overhead is applied on the basis of
direct labor-hours, then the variable overhead
comparing the number of direct labor-hours
actually worked to the standard hours allowed.
rate, differs between the two variances.
output of the entire system is limited by the
capacity of the bottleneck. If workstations
before the bottleneck in the production process
The Foundational 15
1., 2., and 3.
The raw materials cost included in the flexible budget (SQ × SP =
$1,200,000), the materials quantity variance ($80,000 U), and the
The Foundational 15 (continued)
4. and 5.
The materials quantity variance ($80,000 U), and the materials price
The Foundational 15 (continued)
6., 7., and 8.
The direct labor cost included in the flexible budget (SH × SR = $840,000),
the labor efficiency variance ($70,000 F), and the labor rate variance
The Foundational 15 (continued)
9., 10., and 11.
The variable overhead cost included in the flexible budget (SH × SR =
$300,000), the variable overhead efficiency variance ($25,000 F), and the
The Foundational 15 (continued)
12. The amounts included in the flexible budget are computed as follows:
Preble Company
Flexible Budget
For the Month Ended March 31
Units sold (
q
) …………………………………………………….
30,000
Expenses:
Advertising ($200,000) …………………………..
$200,000
Sales salaries and commissions
($100,000 + $12.00
q
) …………………………..
$460,000
Shipping expenses ($3.00
q
) …………………………..
90,000
13., 14., and 15.
The spending variances for advertising ($), sales salaries and commissions
($), and shipping expenses ($) are computed as follows:
Preble Company
Spending Variances
For the Month Ended March 31
Flexible
Budget
Actual
Results
Spending
Variances
Units sold(
q
) …………………………..
30,000
30,000
Expenses:
Advertising ($200,000) …………..
$200,000
$210,000
$10,000
U
Sales salaries and commissions
($100,000 + $12.00
q
) …………
$460,000
$455,000
$5,000
F
Shipping expenses ($3.00
q
) …….
$90,000
$115,000
$25,000
U
Exercise 8-1 (10 minutes)
Puget Sound Divers
Flexible Budget
For the Month Ended May 31
Actual diving-hours ……………………………….
105
Revenue ($365.00q) ……………………………..
$38,325
Expenses:
Wages and salaries ($8,000 + $125.00q) …
21,125
Supplies ($3.00q) ……………………………….
315
Equipment rental ($1,800 + $32.00q) …….
5,160
Insurance ($3,400) …………………………..…
3,400
Miscellaneous ($630 + $1.80q) ……………..
819
Total expense ………………………………………
30,819
Net operating income …………………………….
$ 7,506
Exercise 8-2 (15 minutes)
Quilcene Oysteria
Revenue and Spending Variances
For the Month Ended August 31
Actual
Results
Flexible
Budget
Revenue
and
Spending
Variances
Pounds …………………………………
8,000
8,000
Revenue ($4.00q) ……………………
$35,200
$32,000
$3,200
F
Expenses:
Packing supplies ($0.50q) ……….
4,200
4,000
200
U
Oyster bed maintenance
($3,200) …………………………..
3,100
3,200
100
F
Wages and salaries ($2,900 +
$0.30q) …………………………….
5,640
5,300
340
U
Shipping ($0.80q) …………………
6,950
6,400
550
U
Utilities ($830) ……………………..
810
830
20
F
Other ($450 + $0.05q) …………..
980
850
130
U
Total expense …………………………
21,680
20,580
1,100
U
Net operating income ………………
$13,520
$11,420
$2,100
F
Exercise 8-3 (15 minutes)
Alyeski Tours
Planning Budget
For the Month Ended July 31
Budgeted cruises (q1) ………………………………………………….
24
Budgeted passengers (q2) ……………………………………………
1,400
Revenue ($25.00q2) ……………………………………………………
$35,000
Expenses:
Vessel operating costs ($5,200 + $480.00q1 +$2.00q2) ……
19,520
Advertising ($1,700) …………………………………………………
1,700
Administrative costs ($4,300 + $24.00q1 +$1.00q2) ………..
6,276
Insurance ($2,900) …………………………………………………..
2,900
Total expense ……………………………………………………………
30,396
Net operating income ………………………………………………….
$ 4,604
Exercise 8-4 (20 minutes)
1.
Number of helmets …………………………………….
35,000
Standard kilograms of plastic per helmet …………
× 0.6
Total standard kilograms allowed …………………..
21,000
Standard cost per kilogram …………………………..
× $8
Total standard cost …………………………………….
$168,000
Actual cost incurred (given) ………………………….
$171,000
Total standard cost (above) ………………………….
168,000
Total material variance—unfavorable ………………
$ 3,000
2.
Actual Quantity
of Input, at
Actual Price
Actual Quantity of Input,
at Standard Price
Standard Quantity
Allowed for Output, at
Standard Price
(AQ × AP)
(AQ × SP)
(SQ × SP)
22,500 kilograms ×
21,000 kilograms* ×
$8 per kilogram
$8 per kilogram
$171,000
= $180,000
= $168,000
Price Variance =
$9,000 F
Quantity Variance =
$12,000 U
Spending Variance = $3,000 U
*35,000 helmets × 0.6 kilograms per helmet = 21,000 kilograms
Alternatively, the variances can be computed using the formulas:
Materials price variance = AQ (AP – SP)
22,500 kilograms ($7.60 per kilogram* – $8.00 per kilogram)
= $9,000 F
* $171,000 ÷ 22,500 kilograms = $7.60 per kilogram
Materials quantity variance = SP (AQ – SQ)
$8 per kilogram (22,500 kilograms – 21,000 kilograms)
= $12,000 U
Exercise 8-5 (20 minutes)
1.
Number of meals prepared ……………….
4,000
Standard direct labor-hours per meal ….
× 0.25
Total direct labor-hours allowed …………
1,000
Standard direct labor cost per hour …….
× $9.75
Total standard direct labor cost ………….
$9,750
Actual cost incurred …………………………
$9,600
Total standard direct labor cost (above)
9,750
Total direct labor variance ………………..
$ 150
Favorable
2.
Actual Hours of
Input, at the
Actual Rate
Actual Hours of Input,
at the Standard Rate
Standard Hours
Allowed for Output, at
the Standard Rate
(AH × AR)
(AH × SR)
(SH × SR)
960 hours ×
$10.00 per hour
960 hours ×
$9.75 per hour
1,000 hours ×
$9.75 per hour
= $9,600
= $9,360
= $9,750
Rate Variance =
$240 U
Efficiency Variance =
$390 F
Spending Variance = $150 F
Alternatively, the variances can be computed using the formulas:
Labor rate variance = AH(AR – SR)
= 960 hours ($10.00 per hour – $9.75 per hour)
= $240 U
Labor efficiency variance = SR(AH – SH)
= $9.75 per hour (960 hours – 1,000 hours)
= $390 F
Exercise 8-6 (20 minutes)
1.
Number of items shipped …………………………...
120,000
Standard direct labor-hours per item …………….
× 0.02
Total direct labor-hours allowed …………………..
2,400
Standard variable overhead cost per hour ………
× $3.25
Total standard variable overhead cost …………..
$ 7,800
Actual variable overhead cost incurred ………….
$7,360
Total standard variable overhead cost (above) ..
7,800
Total variable overhead variance ………………….
$ 440
Favorable
2.
Actual Hours of
Input, at the
Actual Rate
Actual Hours of Input,
at the Standard Rate
Standard Hours
Allowed for Output, at
the Standard Rate
(AH × AR)
(AH × SR)
(SH × SR)
2,300 hours ×
$3.20 per hour*
2,300 hours ×
$3.25 per hour
2,400 hours ×
$3.25 per hour
= $7,360
= $7,475
= $7,800
Variable Overhead Rate
Variance = $115 F
Variable Overhead
Efficiency Variance =
$325 F
Spending Variance = $440 F
*$7,360 ÷ 2,300 hours = $3.20 per hour
Alternatively, the variances can be computed using the formulas:
Variable overhead rate variance:
AH(AR – SR) = 2,300 hours ($3.20 per hour – $3.25 per hour)
= $115 F
Variable overhead efficiency variance:
SR(AH – SH) = $3.25 per hour (2,300 hours – 2,400 hours)
= $325 F
Exercise 8-7 (15 minutes)
Lavage Rapide
Planning Budget
For the Month Ended August 31
Budgeted cars washed (q) ………………………..
9,000
Revenue ($4.90q) …………………………………..
$44,100
Expenses:
Cleaning supplies ($0.80q) ……………………..
7,200
Electricity ($1,200 + $0.15q) ………………….
2,550
Maintenance ($0.20q)…………………………...
1,800
Wages and salaries ($5,000 + $0.30q) ……..
7,700
Depreciation ($6,000) …………………………...
6,000
Rent ($8,000) ……………………………………..
8,000
Administrative expenses ($4,000 + $0.10q) .
4,900
Total expense ………………………………………..
38,150
Net operating income ………………………………
$ 5,950
Exercise 8-8 (15 minutes)
Lavage Rapide
Flexible Budget
For the Month Ended August 31
Actual cars washed (q) …………………………….
8,800
Revenue ($4.90q) …………………………………..
$43,120
Expenses:
Cleaning supplies ($0.80q) ……………………..
7,040
Electricity ($1,200 + $0.15q) ………………….
2,520
Maintenance ($0.20q)…………………………...
1,760
Wages and salaries ($5,000 + $0.30q) ……..
7,640
Depreciation ($6,000) …………………………...
6,000
Rent ($8,000) ……………………………………..
8,000
Administrative expenses ($4,000 + $0.10q) .
4,880
Total expense ………………………………………..
37,840
Net operating income ………………………………
$ 5,280
Exercise 8-9 (20 minutes)
Lavage Rapide
Revenue and Spending Variances
For the Month Ended August 31
Actual
Results
Flexible
Budget
Revenue
and
Spending
Variances
Cars washed (q) ……………………..
8,800
8,800
Revenue ($4.90q) ……………………
$43,080
$43,120
$ 40
U
Expenses:
Cleaning supplies ($0.80q) ………
7,560
7,040
520
U
Electricity ($1,200 + $0.15q) …..
2,670
2,520
150
U
Maintenance ($0.20q)…………….
2,260
1,760
500
U
Wages and salaries
($5,000 + $0.30q) ……………
8,500
7,640
860
U
Depreciation ($6,000) …………….
6,000
6,000
0
Rent ($8,000) ………………………
8,000
8,000
0
Administrative expenses
($4,000 + $0.10q) ………………
4,950
4,880
70
U
Total expense …………………………
39,940
37,840
2,100
U
Net operating income ……………….
$ 3,140
$ 5,280
$2,140
U
Exercise 8-10 (30 minutes)
1.
Number of units manufactured ………………………..
20,000
Standard labor time per unit
(18 minutes ÷ 60 minutes per hour) ………………
× 0.3
Total standard hours of labor time allowed …………
6,000
Standard direct labor rate per hour …………………..
× $12
Total standard direct labor cost ……………………….
$72,000
Actual direct labor cost ………………………………….
$73,600
Standard direct labor cost ………………………………
72,000
Total variance—unfavorable …………………………...
$ 1,600
2.
Actual Hours of
Input, at the
Actual Rate
Actual Hours of Input,
at the Standard Rate
Standard Hours Allowed
for Output, at the
Standard Rate
(AH × AR)
(AH × SR)
(SH × SR)
5,750 hours ×
$12.00 per hour
6,000 hours* ×
$12.00 per hour
$73,600
= $69,000
= $72,000
Rate Variance =
$4,600 U
Efficiency Variance =
$3,000 F
Spending Variance = $1,600 U
*20,000 units × 0.3 hours per unit = 6,000 hours
Alternatively, the variances can be computed using the formulas:
Labor rate variance = AH (AR – SR)
5,750 hours ($12.80 per hour* – $12.00 per hour) = $4,600 U
*$73,600 ÷ 5,750 hours = $12.80 per hour
Labor efficiency variance = SR (AH – SH)
$12.00 per hour (5,750 hours – 6,000 hours) = $3,000 F
Exercise 8-10 (continued)
3.
Actual Hours of
Input, at the
Actual Rate
Actual Hours of Input,
at the Standard Rate
Standard Hours
Allowed for Output, at
the Standard Rate
(AH × AR)
(AH × SR)
(SH × SR)
5,750 hours ×
$4.00 per hour
6,000 hours ×
$4.00 per hour
$21,850
= $23,000
= $24,000
Rate Variance =
$1,150 F
Efficiency Variance =
$1,000 F
Spending Variance = $2,150 F
Alternatively, the variances can be computed using the formulas:
Variable overhead rate variance = AH (AR – SR)
5,750 hours ($3.80 per hour* – $4.00 per hour) = $1,150 F
*$21,850 ÷ 5,750 hours = $3.80 per hour
Variable overhead efficiency variance = SR (AH – SH)
$4.00 per hour (5,750 hours – 6,000 hours) = $1,000 F
Exercise 8-11 (20 minutes)
1. If the labor spending variance is $93 unfavorable, and the rate variance
is $87 favorable, then the efficiency variance must be $180 unfavorable,
because the rate and efficiency variances taken together always equal
the spending variance. Knowing that the efficiency variance is $180
Exercise 8-11 (continued)
An alternative approach would be to work from known to unknown data