7-21
7-26 (15−25 min.) Journal entries and T-accounts (continuation of 7-25).
Prepare journal entries and post them to T-accounts for all transactions in Exercise 7-25,
including requirement 2. Summarize how these journal entries differ from the normal-costing
entries described in Chapter 4, pages 121–123.
SOLUTION
7-22
7-23
7-27 (25 min.) Price and efficiency variances, benchmarking.
Topiary Co. produces molded plastic garden pots and other plastic containers. In June 2014,
Topiary produces 1,000 lots (each lot is 12 dozen pots) of its most popular line of pots, the 14–
inch “Grecian urns,” at each of its two plants, which are located in Mineola and Bayside. The
production manager, Janice Roberts, asks her assistant, Alastair Ramy, to find out the precise
per-unit budgeted variable costs at the two plants and the variable costs of a competitor, Land
Art, who offers similar-quality pots at cheaper prices. Ramy pulls together the following
information for each lot:
Required:
1. What is the budgeted variable cost per lot at the Mineola Plant, the Bayside Plant, and at
Land Art?
2. Using the Land Art data as the standard, calculate the direct materials and direct labor price
and efficiency variances for the Mineola and Bayside plants.
3. What advantage does Topiary get by using Land Art’s benchmark data as standards in
calculating its variances? Identify two issues that Roberts should keep in mind in using the
Land Art data as the standards.
SOLUTION
7-24
7-25
7-28 (50 min.) Static and flexible budgets, service sector.
Student Finance (StuFi) is a startup that aims to use the power of social communities to
transform the student loan market. It connects participants through a dedicated lending pool,
enabling current students to borrow from a school’s alumni community. StuFi’s revenue model is
to take an upfront fee of 40 basis points (0.40%) each from the alumni investor and the student
borrower for every loan originated on its platform.
StuFi hopes to go public in the near future and is keen to ensure that its financial results are in
line with that ambition. StuFi’s budgeted and actual results for the third quarter of 2014 are
presented below.
Required:
1. Prepare StuFi’s static budget of operating income for the third quarter of 2014.
2. Prepare an analysis of variances for the third quarter of 2014 along the lines of Exhibit 7-2;
identify the sales volume and flexible budget variances for operating income.
3. Compute the professional labor price and efficiency variances for the third quarter of 2014.
4. What factors would you consider in evaluating the effectiveness of professional labor in the
third quarter of 2014.
SOLUTION
7-26
7-27
7-28
7-29 (30 min.) Flexible budget, direct materials and direct manufacturing labor variances.
Milan Statuary manufactures bust statues of famous historical figures. All statues are the same
size. Each unit requires the same amount of resources. The following information is from the
static budget for 2014:
Standard quantities, standard prices, and standard unit costs follow for direct materials and direct
manufacturing labor:
During 2014, actual number of units produced and sold was 5,100, at an average selling price of
$730. Actual cost of direct materials used was $1,149,400, based on 70,000 pounds purchased at
$16.42 per pound. Direct manufacturing labor-hours actually used were 17,000, at the rate of
$33.70 per hour. As a result, actual direct manufacturing labor costs were $572,900. Actual fixed
costs were $1,200,000. 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.
7-29
SOLUTION
7-30
7-31
7-30 (30 min.) Variance analysis, nonmanufacturing setting.
Marcus McQueen has run In-A-Flash Car Detailing for the past 10 years. His static budget and
actual results for June 2014 are provided next. Marcus has one employee who has been with him
for all 10 years that he has been in business. In addition, at any given time he also employs two
other less experienced workers. It usually takes each employee 2 hours to detail a vehicle,
regardless of his or her experience. Marcus pays his experienced employee $30 per vehicle and
the other two employees $15 per vehicle. There were no wage increases in June.
Required:
1. How many cars, on average, did Marcus budget for each employee? How many cars did each
employee actually detail?
2. Prepare a flexible budget for June 2014.
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
Marcus to gather, if you wanted to improve operational efficiency?
SOLUTION
7-32
7-33
7-34
7-31 (60 min.) Comprehensive variance analysis, responsibility issues.
(CMA, adapted) Ultra, Inc., manufactures a full line of well-known sunglasses frames and
lenses. Ultra uses a standard costing system to set attainable standards for direct materials, labor,
and overhead costs. Ultra reviews and revises standards annually as necessary. Department
managers, whose evaluations and bonuses are affected by their department’s performance, are
held responsible to explain variances in their department performance reports.
Recently, the manufacturing variances in the Delta prestige line of sunglasses have caused
some concern. For no apparent reason, unfavorable materials and labor variances have occurred.
At the monthly staff meeting, John Puckett, manager of the Image line, will be expected to
explain his variances and suggest ways of improving performance. Barton will be asked to
explain the following performance report for 2014:
Barton collected the following information:
Three items comprised the standard variable manufacturing costs in 2014:
▪ Direct materials: Frames. Static budget cost of $35,880. The standard input for 2014 is 2.00
ounces per unit.
▪ Direct materials: Lenses. Static budget costs of $96,720. The standard input for 2014 is 4.00
ounces per unit.
▪ Direct manufacturing labor: Static budget costs of $140,400. The standard input for 2014 is 1
hour per unit.
Assume there are no variable manufacturing overhead costs.
The actual variable manufacturing costs in 2014 were as follows:
▪ Direct materials: Frames. Actual costs of $70,080. Actual ounces used were 4.00 ounces per
unit.
▪ Direct materials: Lenses. Actual costs of $131,400. Actual ounces used were 6.00 ounces per
unit.
▪ Direct manufacturing labor: Actual costs of $145,124. The actual labor rate was $14.20 per
hour.
Required:
1. Prepare a report that includes the following:
a. Selling-price variance
b. Sales-volume variance and flexible-budget variance for operating income in the format of
the analysis in Exhibit 7-2
c. Price and efficiency variances for the following:
7-35
▪ Direct materials: frames
▪ Direct materials: lenses
▪ Direct manufacturing labor
2. Give three possible explanations for each of the three price and efficiency variances at Ultra in
requirement 1c.
SOLUTION
7-36
7-37
7-38
7-32 (20 min.) Possible causes for price and efficiency variances.
You are a student preparing for a job interview with a Fortune 100 consumer products
manufacturer. You are applying for a job in the finance department. This company is known for
its rigorous case-based interview process. One of the students who successfully obtained a job
with them upon graduation last year advised you to “know your variances cold!” When you
inquired further, she told you that she had been asked to pretend that she was investigating wage
and materials variances. Per her advice, you have been studying the causes and consequences of
variances. You are excited when you walk in and find that the first case deals with variance
analysis. You are given the following data for May for a detergent bottling plant located in
Mexico:
Please respond to the following questions as if you were in an interview situation:
Required:
1. Calculate the materials efficiency and price variance and the wage and labor efficiency
variances for the month of May.
2. You are given the following context: “Union organizers are targeting our detergent bottling
plant in Puebla, Mexico, for a union.” Can you provide a better explanation for the variances
that you have calculated on the basis of this information?
7-39
SOLUTION
7-40
7-33 (35 min.) Material cost variances, use of variances for performance evaluation.
Katharine Johnson is the owner of Best Bikes, a company that produces high-quality cross-
country bicycles. Best Bikes participates in a supply chain that consists of suppliers,
manufacturers, distributors, and elite bicycle shops. For several years Best Bikes has purchased
titanium from suppliers in the supply chain. Best Bikes uses titanium for the bicycle frames
because it is stronger and lighter than other metals and therefore increases the quality of the
bicycle. Earlier this year, Best Bikes hired Michael Bentfield, a recent graduate from State
University, as purchasing manager. Michael believed that he could reduce costs if he purchased
titanium from an online marketplace at a lower price.
Best Bikes established the following standards based upon the company’s experience with
previous suppliers. The standards are as follows:
Actual results for the first month using the online supplier of titanium are as follows:
Required:
1. Compute the direct materials price and efficiency variances.
2. What factors can explain the variances identified in requirement 1? Could any other
variances be affected?
3. Was switching suppliers a good idea for Best Bikes? Explain why or why not.
4. Should Michael Bentfield’s performance evaluation be based solely on price variances?
Should the production manager’s evaluation be based solely on efficiency variances? Why is
it important for Katharine Johnson to understand the causes of a variance before she
evaluates performance?
5. Other than performance evaluation, what reasons are there for calculating variances?
6. What future problems could result from Best Bikes’ decision to buy a lower quality of
titanium from the online marketplace?