SOLUTION
(45 min.) Static and flexible budgets, service sector.
1.
Static Budget
Revenue (8,200 × 0.8% × $145,000) $9,512,000
Variable costs:
Professional labor (8 × $45 × 8,200) 2,952,000
2.
Actual results for third quarter 2017:
Revenue (10,250 × 0.8% × $162,000) $13,284,000
Variable costs:
Professional labor (9.5 × $50 × 10,250) 4,868,750
Credit verification ($100 × 10,250) 1,025,000
Level 2 Analysis
Flexible- Sales-
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget
(1) (1) – (3) (3) (3) – (5) (5)
Variable costs:
Professional labor 4,868,750 1,178,750 U 3,690,000 738,000 U 2,952,000
Credit verification 1,025,000 0 1,025,000 205,000 U 820,000
Federal doc. Fees 1,281,250 51,250 U 1,230,000 246,000 U 984,000
Fixed administrative costs 945,000 145,000 U 800,000 0 800,000
Fixed technology costs 1,415,000 115,000 U 1,300,000 0 1,300,000
3.
Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
(1) (2) (3)
$486,875 U $691,875 U
Price variance Efficiency variance
4. Effectiveness refers to the degree to which a predetermined objective is accomplished. One objective of StuFi
professional labor is to maximize loan-based revenue (0.8% of loan amount × number of loans). The professional staff has
7-34 Flexible budget, direct materials, and direct manufacturing labor variances. Emerald Statuary manufactures bust
statues of famous historical figures. All statues are the same size. Each unit requires the same amount of resources. The follow-
ing information is from the static budget for 2017:
Expected production and sales 7,000 units
Expected selling price per unit $ 680
Total fixed costs $1,400,000
Standard quantities, standard prices, and standard unit costs follow for direct materials and direct manufacturing labor:
Standard Quantity Standard Price Standard Unit Cost
Direct materials 10 pounds $ 8 per pound $ 80
Direct manufacturing la-
bor
3.7 hours $50 per hour $185
During 2017, actual number of units produced and sold was 4,800, at an average selling price of $720. Actual cost of direct mate-
rials used was $392,700, based on 66,000 pounds purchased at $5.95 per pound. Direct manufacturing labor-hours actually used
were 18,300, at the rate of $48 per hour. As a result, actual direct manufacturing labor costs were $878,400. Actual fixed costs
were $1,170,000. There were no beginning or ending inventories.
Required:
1. Calculate the sales-volume variance and flexible-budget variance for operating income.
2. Compute price and efficiency variances for direct materials and direct manufacturing labor.
SOLUTION
(30 min.) Flexible budget, direct materials and direct manufacturing labor variances.
1. Variance Analysis for Emerald Statuary for 2017
Flexible- Sales-
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget
(1) (2) = (1) – (3) (3) (4) = (3) – (5) (5)
Units sold 4,800a 0 4,800 2,200 U 7,000a
Revenues $3,456,000b $192,000 F $3,264,000c $1,496,000 U $4,760,000d
Direct materials $ 392,700 $ 8,700 U $ 384,000e $ 176,000 F $ 560,000f
a Given
b $720/unit × 4,800 units = $3,456,000
c $680/unit × 4,800 units = $3,264,000
2. Flexible Budget
(Budgeted Input
Actual Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output ×
× Actual Price) × Budgeted Price Budgeted Price)
Direct materials $392,700a$528,000b$384,000c
7-35 Variance analysis, nonmanufacturing setting. Joyce Brown has run Medical Maids, a specialty cleaning service for
medical and dental offices, for the past 10 years. Her static budget and actual results for April 2017 are shown below. Joyce has one
employee who has been with her for all 10 years that she has been in business. In addition, at any given time she also employs two
other less-experienced workers. It usually takes each employee 2 hours to clean an office, regardless of his or her experience.
Brown pays her experienced employee $30 per office and the other two employees $15 per office. There were no wage increases in
April.
Medical Maids Actual and Budgeted Income
Statements For the Month Ended April 30, 2017
Budget Actual
Offices cleaned 140
160
Revenue $26,600 $36,000
Variable costs:
Costs of supplies 630 680
Labor 3,360 4,200
Total variable costs 3,990 4,880
Contribution margin 22,610 31,120
Fixed costs 4,900 4,900
Operating income $17,710
$26,220
Required:
1. How many offices, on average, did Brown budget for each employee? How many offices did each employee actually
clean?
2. Prepare a flexible budget for April 2017.
3. Compute the sales price variance and the labor efficiency variance for each labor type.
4. What information, in addition to that provided in the income statements, would you want Brown to gather, if you wanted to
improve operational efficiency?
SOLUTION
(30 min.) Variance analysis, nonmanufacturing setting
1. This is a problem of two equations & two unknowns. The two equations relate to the number of offices cleaned and the
labor costs (the wages paid to the employees).
X = number of offices cleaned by the experienced employee
Y = number of offices cleaned by the less experienced employees (combined)
Budget: X + Y = 140 Actual: X + Y = 160
$30X + $15Y = $3,360 $30X + $15Y = $4,200
Budget: The experienced employee is budgeted to clean 84 offices (and earn $2,520), and the less experienced
Actual: The experienced employee cleans 120 offices (and grosses $3,600 for the month), and the other two
2.
Actual
Results
(1)
Flexible-
Budget
Variances
(2) = (1) –
(3)
Flexible
Budget
(3)
Sales –
Volume
Variance
(4) = (3) –
(5)
Static
Budget
(5)
Offices cleaned 160 160 140
Revenues $36,000 $ 5,600 F $30,400a $ 3,800 F $ 26,600
Variable costs
3. Actual sales price = $36,000 ÷ 160 = $225
Sales Price Variance
= (Actual sales price – Budgeted sales price) × Actual number of offices cleaned:
Labor efficiency for experienced worker:
Standard offices expected to be completed by experienced worker based on actual number of offices cleaned = (84 ÷
140) × 160 = 96 offices
Labor efficiency variance = Budgeted wage rate per office × (Actual offices cleaned – budgeted offices cleaned)
Labor efficiency for less-experienced workers:
Standard offices expected to be completed by less-experienced workers based on actual number of offices cleaned =
4. In addition to understanding the variances computed above, Brown should attempt to keep track of the number of
7-36 Comprehensive variance analysis review. Ellis Animal Health, Inc., produces a generic medication used to
treat cats with feline diabetes. The liquid medication is sold in 100 ml vials. Ellis employs a team of sales representatives who are
paid varying amounts of commission.
Given the narrow margins in the generic veterinary drugs industry, Ellis relies on tight standards and cost controls to manage its
operations. Ellis has the following budgeted standards for the month of April 2017:
Average selling price per vial $ 8.30
Total direct materials cost per vial $ 3.60
Direct manufacturing labor cost per hour $ 15.00
Average labor productivity rate (vials per hour) 100
Sales commission cost per vial $ 0.72
Fixed administrative and manufacturing over-
head
$990,000
Ellis budgeted sales of 700,000 vials for April. At the end of the month, the controller revealed that actual results for April had
deviated from the budget in several ways:
Unit sales and production were 90% of plan.
Actual average selling price decreased to $8.20.
Productivity dropped to 90 vials per hour.
Actual direct manufacturing labor cost was $15.20 per hour.
Actual total direct material cost per unit increased to $3.90.
Actual sales commissions were $0.70 per vial.
Fixed overhead costs were $110,000 above budget.
Calculate the following amounts for Ellis for April 2017:
Required:
1. Static-budget and actual operating income
2. Static-budget variance for operating income
3. Flexible-budget operating income
4. Flexible-budget variance for operating income
5. Sales-volume variance for operating income
6. Price and efficiency variances for direct manufacturing labor
7. Flexible-budget variance for direct manufacturing labor