16
Fundamentals of Variance Analysis
Solutions to Review Questions
16–1.
For performance evaluation purposes, the costing format should identify the actual costs
for comparison with expected costs during the relevant period. Under absorption costing,
16–2.
16–3.
16–4.
(d) Appropriate for any level of activity.
16–5.
16–6.
16–7.
16–8.
The three primary sources of variances are:
16–9.
The fixed cost variances differ from variable cost variances because fixed costs do not
Solutions to Critical Analysis and Discussion Questions
16–10.
Preparation of the ex-post budget allows management to compare actual results with the
16–11.
A flexible budget indicates budgeted revenues, costs and profits for virtually all feasible
16–12.
Selling more units of a product or service (assuming the price is not changed) might be
16–13.
Answers will vary. A common theme might be that the organization used resources that
16–14.
The action that management can take in response to price variances is probably quite
16–15.
This problem arises more frequently than one would hope. Because costs are
accumulated in responsibility centers usually according to where the cost is incurred, it is
16–16.
Typically, the labor price variances are relatively small since the rates are usually
determined in advance through the union negotiation process. However, if a line manager
16–17.
16–18.
It is necessary to investigate the reasons why volume fell short of expectations. If
marketing was unable to sell the production then the marketing manager might be held
16–19.
There are two reasons why this view is not a good one. First, the fact that the division is
routinely delivering profits greater than expected suggests the budgeting process should
16–20.
Solutions to Exercises
16–21. (20 min.) Flexible Budgeting: Western Company.
Calculations: Master budget dollar amount
Sales revenue …………………………………………….
225,000 units x $9.00 per unit =
$2,025,000
Variable manufacturing costs …………………….
(= $3.75 x 230,000)
Fixed manufacturing costs ………………………..
16–22. (30 min.) Sales Activity Variance: Western Company.
Flexible Budget
(based on actual
of 230,000 units)
Sales
Activity
Variance
Master Budget
(based on
budgeted
225,000 units)
Sales revenue …………………………………………….
$2,070,000
$45,000 F
$2,025,000
Contribution margin …………………………………….
$1,181,250
16–23. (30 min.) Profit Variance Analysis: Western Company
Actual
(230,000
Units)
Manufacturing
Variances
Sales Price
Variance
Flexible Budget
(230,000 Units)
Activity
Variance
Master Budget
(225,000 Units)
Sales revenue …………………………………………….
$2,093,000a
$23,000 F
$2,070,000b
$45,000 F
$2,025,000c
Contribution margin …………………………………….
$23,000 F
a 230,000 units x $9.10
16–24. (20 min.) Flexible Budget.
16–25. (25 min.) Fill In Amounts On Flexible Budget Graph.
Computations:
(a)
Profit
=
(P – V)X – FC
(b)
=
$116 X – $200,000
$290,000
16–26. (25 min.) Flexible Budget.
Computations:
(a)
Profit
=
(P – V)X – FC
=
($6,000) + $70,000
=
16–27. (35 min.) Prepare Flexible Budget: Osage, Inc.
Flexible
Budget
(based on
actual of
450,000 units)
Calculations
(000 omitted for units)
Sales revenue …………………………………………….
$4,500,000
$4,800,000
x
(450 ÷ 480)
Variable costs:
Materials …………………………………………………
x
Direct labor ……………………………………………..
x
(450 ÷ 480)
Variable marketing and administrative …………
480,000
x
Contribution margin ……………………………………..
$1,800,000
Fixed costs:
Manufacturing overhead …………………………...
Marketing ………………………………………………..
Total fixed costs ………………………………………….
Operating profits ………………………………………….
16–28. (45 min.) Sales Activity Variance: Osage, Inc.
Flexible
Budget
(based on
actual of
450,000
units)
Sales Activity
Variance
Master
Budget
(based on
budgeted
480,000
units)
Sales revenue …………………………………………….
$4,500,000
$300,000
U
$4,800,000
Variable costs:
Materials ………………………………………………..
1,350,000
90,000
F
1,440,000
Direct labor ……………………………………………..
315,000
21,000
F
336,000
F
Variable marketing and administrative ………..
F
480,000
F
Contribution margin …………………………………….
$120,000
U
Fixed costs:
Manufacturing overhead …………………………..
$ 960,000
Marketing ……………………………………………….
288,000
Total fixed costs ………………………………………….
$1,428,000
Operating profits …………………………………………
$ 372,000
$120,000
U
16–29. (30 min.) Profit Variance Analysis: Osage, Inc.
Actual
(based on
450,000
units)
Manufacturing
Variances
Marketing and
Administrative
Variances
Sales Price
Variance
Flexible
Budget
(based on
450,000
units)
Sales
Activity
Variance
Master
Budget
(based on
480,000
units)
Sales revenue …………………………………………….
$4,968,000
$468,000 F
$4,500,000
$300,000 U
$4,800,000
Materials ……………………………………………………
1,440,000
$90,000 U
1,350,000
90,000 F
1,440,000
Direct labor …………………………………………………
276,000
39,000 F
315,000
21,000 F
336,000
450,000
480,000
Total variable costs ……………………………………..
$2,880,000
Contribution margin …………………………..…………
$468,000 F
$1,800,000
$120,000 U
1,920,000
Overhead …………………………………………………..
$ 960,000
Marketing ………………………………………………..
288,000
Total fixed costs ………………………………………….
$1,428,000
Operating profits………………………………………….
$ 628,800
$468,000 F
$ 372,000
$120,000 U
$ 492,000
16–30. (20 min.) Sales Activity Variance: Slacker & Sons.
b. Flexible Budget.
Flexible
Budget
(based on
157,500 units
actual sales)
Sales Activity
Variance
Master Budget
(based on
150,000 units
budgeted
sales)
Sales revenue …………………………………………….
$2,625,000
(a)
$125,000
F
$2,500,000
Variable costs:
Materials ………………………………………………..
892,500
(a)
42,500
U
850,000
Direct labor ……………………………………………..
(a)
31,250
U
625,000
(a)
U
Total variable costs ……………………………………..
$1,680,000
U
$1,600,000
Contribution margin …………………………………….
$945,000
F
Manufacturing overhead and admin ……………
(b)
$ 300,000
Total fixed costs ………………………………………….
Operating profits …………………………………………
$ 645,000
F
16–31. (20 min.) Sales Activity Variance: Rio Vista Company.
a. 15,000 units budgeted sales.
Flexible
Budget
(based on
12,300 units
actual sales)
Sales Activity
Variance
Master Budget
(based on 15,000
units budgeted
sales)
Sales revenue …………………………………………….
$116,850
$25,650
U
$142,500
(a)
Materials …………………………………………………
F
(a)
(a)
(a)
(b)
Operating profits ………………………………………….
U
Notes:
16–32. (15 min.) Assigning Responsibility: Wallace Manufacturing.
Answers will vary. This situation is a normal part of a production department’s business
and would probably be charged to the production department. In the future, it would be
16–33. (15 min.) Assigning Responsibility: Davidson Communications.
It appears that the Building 404 manager acted against the best interests of the company
by refusing to shut down production temporarily. This refusal cost the company $75,000
16–34. (10 min.) Variable Cost Variances.
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
Efficiency
Variance
Flexible Budget
(Standard Inputs
Allowed for Good
Output)
$136,500
$14 x 9,600
= $134,400
$14 x 1.5 x 5,600
= $117,600
16–35. (20 min.) Variable Cost Variances: Vickers Corporation.
Direct labor:
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
Efficiency
Variance
Flexible Budget
(Standard
Inputs Allowed
for Good
Output)
16–36. (20 min.) Variable Cost Variances: Norton, Inc..
Direct labor:
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
Efficiency
Variance
Flexible Budget
(Standard
Inputs Allowed
for Good
Output)
16–37. (15 min.) Variable Cost Variances: Bowgie Chemicals.
a.
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
Efficiency
Variance
Flexible Budget
(Standard
Inputs Allowed
for Good
Output)
b.
Work-in-Process Inventory …………………………...
119,700
Materials Price Variance ………………………………
5,400
16–38. (20 min.) Variable Cost Variances: Grand Corporation. (Appendix used in
Part b.)
a.
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
Efficiency
Variance
Flexible Budget
(Standard
Inputs Allowed
for Good
Output)
b.
Work-in-Process Inventory …………………………...
396,000
16–39. (20 min.) Fixed Cost Variances: Carney Co.
Actual
Costs
Price
Variance
Budget
Production
Volume
Variance
Applied
$385,500
16–40. (15 min.) Graphical Presentation: Carney Co.
16–41. (20 min.) Fixed Cost Variances: Lihue, Inc.
a.
Actual
Costs
Price
Variance
Budget
Production
Volume
Variance
Applied
16–42. (20 min.) Fixed Cost Variances: Mint Company.
Actual
Costs
Price
Variance
Budget
Production
Volume
Variance
Applied
16–43. (45 min.) Comprehensive Cost Variance Analysis: Maple Leaf Production.
a. Variable cost:
Direct materials:
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
Efficiency
Variance
Flexible Budget
(Standard Inputs
Allowed for Good
Output)
(AP x AQ)
(SP x AQ)
(SP x SQ)
Direct labor:
Variable overhead:
16-43. (continued)
b. Fixed overhead variances:
Actual
Costs
Price
Variance
Budget
Production
Volume
Variance
Applied
16-43. (continued)
c.
Record Costs
Direct materials:
Work-in-Process Inventory …………………………...
736,000
Materials Price Variance ……………..
Accounts Payable ………………………
Work-in-Process Inventory …………………………...
Variable overhead:
Work-in-Process Inventory …………………………..
165,600
Variable Overhead Applied …………
Fixed overhead:
Work-in-Process Inventory …………………………..
1,380,000
Fixed Overhead Applied ……………..
1,380,000
Fixed Overhead (Actual) …………….
1,360,000
16-43. (continued)
Transfer to Finished Goods
Finished Goods Inventory ……………………………………
Accounts Receivable …………………………………………..
3,680,000
Record the sale of 92,000 tires at $40.
Record the disposition of variances.
Materials Price Variance …………………………..………………
76,800
Direct Labor Efficiency Variance ………………………………..
28,800
Fixed Overhead Production Volume Variance ……………..
To close the variance accounts to Cost of Goods Sold.
16–44. (30 min.) Comprehensive Cost Variance Analysis: NSF Lube.
a. Variable cost variances:
Oil specialist:
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
Efficiency
Variance
Flexible Budget
(Standard Inputs
Allowed for Good
Output)
(AP x AQ)
(SP x AQ)
(SP x SQ)
16-44. (continued)
b. Fixed overhead variances:
Actual
Costs
Price
Variance
Budget
Production
Volume
Variance
Applied
16–45. (20 min.) Overhead Variances: Brice Corporation.
Variable overhead:
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
Efficiency
Variance
Flexible Budget
(Standard Inputs
Allowed for Good
Solutions to Problems
16–46. (30 min.) Solve for Master Budget Given Actual Results: Gibson
Corporation.
a.
Master Budget
Computations
Sales volume ……………………………………………..
108,000 units
Variable costs:
Manufacturing …………………………………………
$540,000 – $54,000 – $380,000
Contribution margin …………………………………….
(given)
Fixed costs:
Marketing and administrative …………………….
$380,000 – $216,000 – $108,000
16–46. (continued)
b.
Actual
(120,000
Units)
Manu-
facturing
Variances
Marketing
and Adminis-
trative
Variances
Sales Price
Variance
Flexible
Budget
(120,000
Units)
Sales Activity
Variance
Master
Budget
(108,000
Units)
Sales revenue …………………………………………….
$672,000
$72,000 F
$600,000a
$60,000 F
$540,000
Variable costs:
11,778 U
Fixed costs:
Manufacturing ………………………………………….
_______
—
108,000 units
16–47. (30 min.) Find missing data for profit variance analysis.
Reported
Income
Statementl
(2,250
Units)
Manu-
facturing
Variance
Marketing
& Adminis-
trative
Variance
Sales
Price
Variance
Flexible
Budget
(2,250a
Units)
Sales
Activity
Variance
Master
Budget
(2,400
Units)
Sales revenue …………………………………………….
$117,000
$4,500 Ub
$121,500
$8,100 Uc
$129,600d
16-47. (continued)
16–48. (40 min.) Find Data for Profit Variance Analysis.
Reported
(based on
actual sales
volume)
Manufac-
turing
Variance
Marketing and
Administrative
Variance
Sales
Price
Variance
Flexible
Budget
(based
on actual
sales
volume)
Sales
Activity
Variance
Master
Budget
(based on
budgeted
sales
volume)
Less:
$14,280
q
s
$2,000 F
k
$10,000
m
d
Fixed marketing and
v
e
Variable
16-48. (continued)
Computations:
16–49. (20 min.) Ethical Issues In Managing Reported Profits: Doak Industries.
Ray is trying to improve the profit on next year’s income statement. He knows that a
revised budget to reflect changes in product lines might make it harder to get a bonus next
16–50. (20 min.) Prepare Flexible Budget: Odessa, Inc.
Flexible
Budgeta
Calculations
Sales revenue …………………………………………….
$86,400
$96,000
x
(540 ÷ 600)
Variable costs:
Manufacturing costs
x
(540 ÷ 600)
x
(540 ÷ 600)
x
(540 ÷ 600)
Total variable costs ……………………………………..
Contribution margin …………………………………….
Total fixed costs ………………………………………….
16–51. (20 min.) Sales Activity Variance: Odessa, Inc.
Flexible
Budget
(based on
actual of
540 units)
Sales Activity
Variance
Master Budget
(based on
budgeted 600
units)
Sales revenue …………………………………………….
$86,400
$9,600
U
$96,000
Less variable costs:
Manufacturing costs:
Direct labor …………………………………………..
12,960
1,440
F
14,400
12,096
F
13,440
F
Marketing ………………………………………………..
F
F
F
Contribution margin ……………………………………..
$43,200
U
$48,000
Less fixed costs:
Administrative ………………………………………
Total fixed costs ………………………………………….
$24,000
Operating profits ………………………………………….
$19,200
$4,800
U
$24,000
16–52. (30 min.) Profit Variance Analysis: Odessa, Inc.
Actual
(360 Units)
Manu-
facturing
Variance
Marketing &
Administrative
Variance
Sales Price
Variance
Flexible
Budget
(360 Units)
Sales
Activity
Variance
Master
Budget
(400 Units)
Sales revenue …………………………………………….
$88,320
$1,920
F
$86,400
$9,600
U
$96,000
Variable costs:
Manufacturing
Direct labor …………………………………………..
13,632
U
12,960
F
14,400
11,520
F
12,096
F
13,440
Overhead …………………………………………….
F
F
Marketing ………………………………………………..
F
F
Contribution margin ……………………………………..
$45,408
F
U
$1,920
F
$43,200
$4,800
U
$48,000
Fixed costs:
Manufacturing …………………………..……………..
F
Marketing ………………………………………………..
U
F
Operating profit …………………………………………..
$21,198
F
U
$1,920
F
$19,200
$4,800
U
$24,000
16–53. (20 min.) Prepare Flexible Budget: Brahms & Sons.
Flexible Budgeta
Calculations
Sales revenue …………………………………………….
$504,000
$480,000
x
(58,800 ÷ 56,000)
Variable costs:
Manufacturing costs
x
(58,800 ÷ 56,000)
(58,800 ÷ 56,000)
x
(58,800 ÷ 56,000)
x
(58,800 ÷ 56,000)
(58,800 ÷ 56,000)
Total variable costs ……………………………………..
Contribution margin ……………………………………..
Total fixed costs ………………………………………….
16–54. (20 min.) Sales Activity Variance: Brahms & Sons.
Flexible
Budget
(based on
actual of
58,800 units)
Sales Activity
Variance
Master Budget
(based on
budgeted
56,000 units)
Sales revenue …………………………………………….
$504,000
$24,000
F
$480,000
Less variable costs:
Manufacturing costs:
U
U
U
Contribution margin …………………………………….
$277,200
F
$264,000
Total fixed costs ………………………………………….
$200,000
$200,000
Operating profits …………………………………………
F
16–55. (30 min.) Profit variance analysis: Brahms & Sons.
Actual
(58,800 Units)
Manu-
facturing
Variance
Marketing &
Administration
Variance
Sales Price
Variance
Flexible
Budget
(58,800
Units)
Sales
Activity
Variance
Master
Budget
(56,000
Units)
Sales revenue …………………………………………….
$462,000
$42,000
U
$504,000
$24,000
F
$480,000
Variable costs:
Manufacturing
Direct labor …………………………………………..
U
U
Materials ……………………………………………..
12,600
F
U
F
U
Marketing ………………………………………………..
F
U
Contribution margin …………………………..…………
$246,000
$8,000
F
F
$42,000
U
$277,200
F
$264,000
Fixed costs:
U
Marketing ………………………………………………..
U
Administration ………………………………………….
U
Operating profit …………………………………………..
$5,600
F
U
$42,000
U
F
16–56. (15 min.) Direct Materials.
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
16–57. (20 min.) Solve for Direct Labor Hours: Williams Corporation.
Set up variance model:
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
Efficiency
Variance
Flexible Budget
(Standard
Inputs Allowed
for Good
Output)
16–58. (20 min.) Overhead Variances: Rexford Components.
Variable overhead:
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
Efficiency
Variance
Flexible Budget
(Standard Inputs
Allowed for Good
Output)
16–59. (40 min.) Manufacturing Variances: Delta Products.
Direct materials:
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
Efficiency
Variance
Flexible Budget
(Standard Inputs
Allowed for Good
Output)
(AP x AQ)
(SP x AQ)
(SP x SQ)
Direct labor:
Variable overhead:
16–60. (20 min.) Overhead Cost and Variance Relationships: McDormand Inc.
a. Variable overhead:
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
Efficiency
Variance
Flexible Budget
(Standard Inputs
Allowed for Good
Output)
b. Fixed overhead:
Actual
Costs
Price
Variance
Budget
Production
Volume
Variance
Applied
= $719,040
16–61. (20 min.) Analysis of Cost Reports: Cabot Plant.
Three possible changes that could make the cost information more meaningful are:
16–62. (25 min.) Change Of Policy To Improve Productivity: Orange Electronics.
Currently the soldering personnel rarely complete the operations in less time than the
standard allows. Assuming that the soldering department is working efficiently, it is not
16–63. (20 min.) Ethics and Standard Costs: Farmer Frank’s.
Margaret’s behavior is unethical. Margaret has an obligation to communicate information
16–64. (40 min.) Comprehensive Variance Problem: Chambers Company.
Direct materials:
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
Efficiency
Variance
Flexible Budget
(Standard Inputs
Allowed for Good
Output)
(AP x AQ)
(SP x AQ)
(SP x SQ)
16–64. (continued)
Variable overhead:
Actual Inputs
at Standard
Efficiency
Variance
Flexible Budget
(Standard Inputs
Allowed for
Fixed overhead:
Budget
Production
Volume
Variance
Applied
16–65. (25 min.) Find Actual And Budget Amounts From Variances: J&W
Corporation.
a. Direct materials:
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
Efficiency
Variance
Flexible Budget
(Standard Inputs
Allowed for Good
Output)
(AP x AQ)
(SP x AQ)
(SP x SQ)
16–65. (continued)
b. Overhead:
Actual
Costs
Applied
16–66. (40 min.) Variance Computations With Missing Data: Studio Company.
Note: The calculation of the fixed overhead budget amount makes this a challenging
problem. (Footnotes follow the calculations.)
Direct materials:
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
Efficiency
Variance
Flexible Budget
(Standard Inputs
Allowed for Good
Output)
(AP x AQ)
(SP x AQ)
(SP x SQ)
16–66. (continued)
Fixed overhead:
Actual
Costs
Price
Variance
Budget
Production
Volume
Variance
Applied
16–67.
(50 min.) Comprehensive Variance Problem: Sweetwater Company.
Mountain Mist:
a. Direct materials:
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
Efficiency
Variance
Flexible Budget
(Standard Inputs
Allowed for Good
Output)
(AP x AQ)
(SP x AQ)
(SP x SQ)
Variable overhead:
16–67. (continued)
b. Fixed overhead:
Actual
Costs
Price
Variance
Budget
Production
Volume
Variance
Applied
16–67. (continued)
Valley Stream:
a. Direct materials:
Actual
Costs
Price
Variance
Actual Inputs
at Standard
Price
Efficiency
Variance
Flexible Budget
(Standard Inputs
Allowed for Good
Output)
(AP x AQ)
(SP x AQ)
(SP x SQ)
Variable overhead:
$52.50 x 7,400
$52.50 x 6 hours
16–67. (continued)
b. Fixed overhead:
Actual
Costs
Price
Variance
Budget
Production
Volume
Variance
Applied
Integrative Case
16–68. (60 min to 90 min) Performance Measurement and Variances: agm.com.
a.
The following variances can be computed to understand better why actual income fell
short of budgeted income.
Factor:
Initial income variance …………………………………
($88,760 – $6,800)
81,960
U
Sales variances
24,000
U
Total sales variance …………………………...
U
Production cost variances
Price variances
Reed ………………………………………………..
F
Handle ……………………………………………..
F
Labor ………………………………………………..
U
U
Efficiency variances
Reed ………………………………………………..
F
Labor ………………………………………………..
U
U
Spending …………………………………………..
U
Efficiency ………………………………………….
U
U
Marketing variance ……………………………………..
45,000
U
16-68. (continued)
b.
The two specific items in the case that deal directly with this are the material savings and
the strike. The estimated cost of the strike can be computed as:
c.
Certainly Mary is not responsible (in the sense of control) for the strike. However, she is
