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SOLUTION
(30 min.) Direct-cost and selling price variances.
1. Computing unit selling prices and unit costs of inputs:
Actual selling price = $3,626,700 ÷ 462,000
2., 3., and 4.
The actual and budgeted unit costs are:
Actual Budgeted
Direct materials
Direct manuf. labor
The actual output achieved is 462,000 Mini SDs.
The direct cost price and efficiency variances are:
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
(1)
Price
Variance
(2)=(1)–(3)
Actual
Input Qty.
× Budgeted
Price
(3)
Efficiency
Variance
(4)=(3)–(5)
Flex. Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(5)
Direct materials
Direct manuf. labor costs
Comments on the variances include:
Selling price variance. This may arise from a proactive decision to reduce price to ex-
Material price variance. The $0.01 increase in the price per connector pin could arise
Material efficiency variance. For all three material inputs, usage is greater than bud-
Labor efficiency variance. There is a small favorable efficiency variance for setup la-
Labor price variance. There is an unfavorable price variance for fabrication as a result of the
$1 higher wage per hour paid for that labor. The higher labor quality could also explain the sig-
nificant efficiency variance for fabrication labor7-46 Variances in the service sector. Derek Wilson oper-
ates Clean Ride Enterprises, an auto detailing company with 20 employees. Jamal Jackson has recently been hired
by Wilson as a controller. Clean Ride’s previous accountant had done very little in the area of variance analysis, but
Jackson believes that the company could benefit from a greater understanding of his business processes. Because of
the labor-intensive nature of the business, he decides to focus on calculating labor variances.
Jackson examines past accounting records, and establishes some standards for the price and
quantity of labor. While Clean Ride’s employees earn a range of hourly wages, they fall into two
general categories: skilled labor, with an average wage of $20 per hour, and unskilled labor, with
an average wage of $10 per hour. One standard 5-hour detailing job typically requires a combina-
tion of 3 skilled hours and 2 unskilled hours.
Actual data from last month, when 600 detailing jobs were completed, are as follows:
Skilled (2,006 hours) $ 39,117
Unskilled (944 hours) 9,292
Total actual direct labor cost $ 48,409
Looking over last month’s data, Jackson determines that Clean Ride’s labor price variance
was $1,151 favorable, but the labor efficiency variance was $1,560 unfavorable. When Jackson
presents his findings to Wilson, the latter is furious. “Do you mean to tell me that my employees
wasted $1,560 worth of time last month? I’ve had enough. They had better shape up, or else!”
Jackson tries to calm him down, saying that in this case the efficiency variance doesn’t necessari-
ly mean that employees were wasting time. Jackson tells him that he is going to perform a more
detailed analysis, and will get back to him with more information soon.
Required:
1. What is the budgeted cost of direct labor for 600 detailing jobs?
2. How were the $1,151 favorable price variance and the $1,560 unfavorable labor efficiency
variance calculated? What was the company’s flexible-budget variance?
3. What do you think Jackson meant when said that “in this case the efficiency variance doesn’t
necessarily mean that employees were wasting time”?
4. For the 600 detailing jobs performed last month, what is the actual direct labor input mix per-
centage? What was the standard mix for labor?
5. Calculate the total direct labor mix and yield variances.
6. How could these variances be interpreted? Did the employees waste time? Upon further in-
vestigation, you discover that there were some unfilled vacancies last month in the unskilled
labor positions that have recently been filled. How will this new information likely impact
the variances going forward?
SOLUTION
(35 min.) Variances in the service sector
1.
Skilled ($20 × 3 hrs.) $ 60
2. Solution Exhibit 7-46A presents the total price variance ($318 F), the total efficiency variance
($2,200 U), and the total flexible-budget variance ($1,882 U).
SOLUTION EXHIBIT 7-46A
Columnar Presentation of Direct Labor Price and Efficiency Variances for Clean Ride Enterprises
Actual Costs
Incurred
(Actual Input Quantity
× Actual Price)
(1)
Actual Input Quantity
× Budgeted Price
(2)
Flexible Budget
(Budgeted Input Quantity
Allowed for Actual Output
× Budgeted Price)
(3)
Skilled
$39,117
2,006 × $20 = $40,120
1,800 × $20 = $36,000
3. In a company where there is a mixture of workers, some at higher wages and others at lower,
all working on the same projects, an unfavorable efficiency variance can be the result of which
employees worked on the project, not just how many hours were spent. If higher paid workers
worked more than their standard percentage of the time, an unfavorable efficiency variance will
result.
4.
Actual Quan-
tity
of Input
Actual
Mix
Budgeted Quantity
of Input for Actual Output
Budgeted
Mix
Skilled: 2,006 hours 68.0% 3 hours × 600 units = 1,800 hours 60%
5. Solution Exhibit 7-46B presents the total direct labor yield and mix variances for Clean Ride
Enterprises.
SOLUTION EXHIBIT 7-46B
Columnar Presentation of Direct Labor Yield and Mix Variances for Clean Ride Enterprises
Actual Total Quantity
of All Inputs Used
× Actual Input Mix
× Budgeted Price
(1)
Actual Total Quantity
of All Inputs Used
× Budgeted Input Mix
× Budgeted Price
(2)
Flexible Budget:
Budgeted Total Quantity of
All Inputs Allowed for
Actual Output ×
Budgeted Input Mix
× Budgeted Price
(3)
Skilled: 2,950 × 0.68 × $20 = $40,120
2,950 × 0.60 × $20 = $35,400
3,000 × 0.60 × $20 = $36,000
6. While the efficiency variance was unfavorable, it was due to the mix of labor, not the total
hours used. The unfavorable mix variance is the result of a higher than standard percentage of
7-47 Price and efficiency variances, benchmarking and ethics. Sunto Scientific manufac-
tures GPS devices for a chain of retail stores. Its most popular model, the Magellan XS, is assem-
bled in a dedicated facility in Savannah, Georgia. Sunto is keenly aware of the competitive threat
from smartphones that use Google Maps and has put in a standard cost system to manage pro-
duction of the Magellan XS. It has also implemented a just-in-time system so the Savannah facil-
ity operates with no inventory of any kind.
Producing the Magellan XS involves combining a navigation system (imported from Sunto’s
plant in Dresden at a fixed price), an LCD screen made of polarized glass, and a casing devel-
oped from specialty plastic. The budgeted and actual amounts for Magellan XS for July 2017
were as follows:
Budgeted Amounts Actual Amounts
Magellan XS units produced 4,000 4,400
Navigation systems cost $81,600 $89,000
Navigation systems 4,080 4,450
Polarized glass cost $40,000 $40,300
Sheets of polarized glass used 800 816
Plastic casing cost $12,000 $12,500
Ounces of specialty plastic used 4,000 4,250
Direct manufacturing labor costs $36,000 $37,200
Direct manufacturing labor-hours 2,000 2,040
The controller of the Savannah plant, Jim Williams, is disappointed with the standard costing
system in place. The standards were developed on the basis of a study done by an outside consul-
tant at the start of the year. Williams points out that he has rarely seen a significant unfavorable
variance under this system. He observes that even at the present level of output, workers seem to
have a substantial amount of idle time. Moreover, he is concerned that the production supervisor,
John Kelso, is aware of the issue but is unwilling to tighten the standards because the current le-
nient benchmarks make his performance look good.
Required:
1. Compute the price and efficiency variances for the three categories of direct materials and for
direct manufacturing labor in July 2017.
2. Describe the types of actions the employees at the Savannah plant may have taken to reduce
the accuracy of the standards set by the outside consultant. Why would employees take those
actions? Is this behavior ethical?
3. If Williams does nothing about the standard costs, will his behavior violate any of the stan-
dards of ethical conduct for practitioners described in the IMA Statement of Ethical Profes-
sional Practice (see Exhibit 1-7 on page 17)?
4. What actions should Williams take?
5. Williams can obtain benchmarking information about the estimated costs of Sunto’s competi-
tors such as Garmin and TomTom from the Competitive Intelligence Institute (CII). Discuss
the pros and cons of using the CII information to compute the variances in requirement 1.
SOLUTION
(30 min.) Price and efficiency variances, benchmarking and ethics.
1. Budgeted navigation systems per unit = 4,080 systems ÷ 4,000 units = 1.02 systems
Budgeted cost of navigation system = $81,600 ÷ 4,080 units = $20 per system
Budgeted sheets of polarized glass per unit = 800 sheets ÷ 4,000 units = 0.20 sheets
Budgeted cost of sheet of polarized glass = $40,000 ÷ 800 sheets = $50 per sheet
Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
$0 $760 F
Price variance Efficiency variance
Price variance Efficiency variance
Direct
Price variance Efficiency variance
2. Actions employees may have taken include:
(a) Adding steps that are not necessary in working on a GPS unit.
(b) Taking more time on each step than is necessary.
Employees may take these actions for several possible reasons.
(a) They may be paid on a piece-rate basis with incentives for above-budgeted
production.
This behavior is unethical if it is deliberately designed to undermine the credibility of the
standards used at Sunto Scientific.
3. If Williams does nothing about standard costs, his behavior will violate the “Standards of
Ethical Conduct for Management Accountants.” In particular, he would be violating the
(a) standards of competence, by not performing technical duties in accordance with rele-
vant standards;
4. Williams should discuss the situation with Kelso and point out that the standards are lax
and that this practice is unethical. If Kelso does not agree to change, Williams should escalate the
5. Main pros of using Competitive Intelligence Institute information to compute variances
are
(a) Highlights to Sunto in a direct way how it may or may not be cost-competitive.
(b) Provides a “reality check” to many internal positions about efficiency or
effectiveness.
Try It! 7-1
(a) Static-budget variance for revenues = (28,000 units × $11) − (27,500 units × $12)
(b) Static-budget variance for variable costs = $90,000 − (27,500 units × $3)
(c) Static-budget variance for fixed costs = $55,000 − $58,000
Actual Static Static-Budget
Results Budget Variance
Units sold 28,000 27,500
Revenues $308,000 $330,000 $22,000 U
Try It! 7-2
(a) Flexible budget for revenues = Actual units × Budgeted selling price per unit
(b) Flexible budget for variable costs = Actual units × Budgeted variable cost per unit
(c) Flexible budget for fixed costs = Static budget
Try It! 7-3
Variance Analysis for Zenefit Corporation
Actual
Results
(1)
Flexible-
Budget
Variances
(2) = (1)-(3)
Flexible
Budget
(3)
Sales -
Volume
Variance
(4) = (3)-(5)
Static
Budget
(5)
Units sold 28,000 28,000 27,500
Try It! 7-4
a. Direct materials variances:
Actual unit cost = $68,600/14,000 square yards
b. Direct manufacturing labor variances:
