Exercises
E23-15 Preparing a flexible budget
Learning Objective 1
$203,500 Op. Inc. for 55,000 units
Safe Now sells its main product, ergonomic mouse pads, for $13 each. Its variable cost is $5.30 per pad.
Fixed costs are $220,000 per month for volumes up to 65,000 pads. Above 65,000 pads, monthly fixed
costs are $275,000. Prepare a monthly flexible budget for the product, showing sales revenue, variable
costs, fixed costs, and operating income for volume levels of 35,000, 55,000, and 80,000 pads.
SOLUTION
SAFE NOW
Monthly Flexible Budget
E23-16 Preparing a flexible budget performance report
Learning Objective 1
Cole Pro Company managers received the following incomplete performance report:
Complete the performance report. Identify the employee group that may deserve praise and the group
that may be subject to criticism. Give your reasoning.
SOLUTION
E23-16, cont.
Based on the overall favorable sales volume variance, marketing and sales personnel deserve praise. The
number of units actually sold was greater than the number of units expected to be sold. The overall
$11,000 favorable sales volume variance is the difference between expected operating income ($31,000)
in the flexible budget for the 39,000 units actually sold and expected operating income ($20,000) in the
static budget based on 31,000 units expected to be sold. The overall favorable sales volume variance and
the individual volume variances for sales revenue ($19,000 favorable), variable expenses ($8,000
unfavorable), and contribution margin ($11,000 favorable) arise only because the company sold 39,000
units rather than the 31,000 units expected in the static budget.
Although the overall variable expenses flexible budget variance is $6,000 unfavorable, this is the net
result of variable production flexible budget variances and variable selling and administrative flexible
budget variances. Further, a variable production flexible budget variance is the net result of the total
direct materials variance, total direct labor variance, and total variable manufacturing overhead variance.
Digging even deeper:
• The total direct material variance is the net result of the direct materials cost variance
(purchasing manager) and direct materials efficiency variance (production manager).
• The total direct labor variance is the net result of the direct labor cost variance (human resources
manager) and direct labor efficiency variance (production manager).
• The total variable manufacturing overhead variance (production manager) is the net result of the
variable overhead cost variance and variable overhead efficiency variance.
E23-17 Preparing a flexible budget performance report
Learning Objective 1
Flex. Bud. Var. for Op. Inc. $46,620 F
Top managers of Stenback Industries predicted 2016 sales of 14,900 units of its product at a unit price of
$7.00. Actual sales for the year were 14,300 units at $10.50 each. Variable costs were budgeted at $2.20
per unit, and actual variable costs were $2.30 per unit. Actual fixed costs of $45,000 exceeded budgeted
fixed costs by $2,000.
Prepare Stenback’s flexible budget performance report. What variance contributed most to the year’s
favorable results? What caused this variance?
SOLUTION
STENBACK INDUSTRIES
Flexible Budget Performance Report
For the Year Ended December 31, 2016
1
2
(1) – (3)
3
4
(3) – (5)
5
Budget
Amounts
per Unit
Actual
Results
Flexible
Budget
Variance
Flexible
Budget
Sales
Volume
Variance
Static
Budget
Units
14,300
14,300
14,900
Sales Revenue
$ 50,050
F
U
Variable Costs
U
F
Contribution Margin
117,260
48,620
F
U
Fixed Costs
45,000
U
Operating Income
$ 72,260
$ 46,620
F
$ 25,640
$ 2,880
U
Flexible Budget Variance Sales Volume Variance
(a)
$ 10.50 per unit
×
14,300 units
=
$ 150,150
(b)
$ 2.30 per unit
×
14,300 units
=
$ 32,890
(c)
$ 7.00 per unit
×
14,300 units
=
$
100,100
(d)
$ 2.20 per unit
×
14,300 units
=
$ 31,460
(e)
$45,000
=
$ 43,000
$ 7.00 per unit
×
14,900 units
=
$ 104,300
(g)
$ 2.20 per unit
×
14,900 units
=
$ 32,780
E23-18 Defining the benefits of setting cost standards and calculating materials and labor
variances
Learning Objectives 2, 3
2. DM Eff. Var. $100 F
Bargain, Inc. produced 1,000 units of the company’s product in 2016. The standard quantity of direct
materials was three yards of cloth per unit at a standard cost of $1.00 per yard. The accounting records
showed that 2,900 yards of cloth were used and the company paid $1.05 per yard. Standard time was
two direct labor hours per unit at a standard rate of $9.75 per direct labor hour. Employees worked 1,800
hours and were paid $9.25 per hour.
Requirements
1. What are the benefits of setting cost standards?
2. Calculate the direct materials cost variance and the direct materials efficiency variance as well as the
direct labor cost and efficiency variances.
SOLUTION
Requirement 1
Benefits of setting cost standards (using a standard costing system) include the following:
Requirement 2
Direct Materials Cost Variance
=
(AC ̶ SC)
×
AQ
=
($1.05 per yard – $1.00 per yard)
×
2,900 yards
=
$145 U
Direct Materials Efficiency Variance
=
×
=
×
=
$100 F
=
×
=
$900 F
=
×
$9.75 per DLHr
=
$1,950 F
×
1,000 units
=
3,000 standard yards
×
1,000 units
=
2,000 standard DLHr
E23-19 Calculating materials and labor variances
Learning Objective 3
DL Eff. Var. $1,540 F
Pro Fender, which uses a standard cost system, manufactured 20,000 boat fenders during 2016, using
146,000 square feet of extruded vinyl purchased at $1.05 per square foot. Production required 410 direct
labor hours that cost $15.00 per hour. The direct materials standard was seven square feet of vinyl per
fender, at a standard cost of $1.10 per square foot. The labor standard was 0.026 direct labor hour per
fender, at a standard cost of $14.00 per hour.
Compute the cost and efficiency variances for direct materials and direct labor. Does the pattern of
variances suggest Pro Fender’s managers have been making trade-offs? Explain.
SOLUTION
Direct Materials Cost Variance
=
(AC ̶ SC)
×
AQ
=
($1.05 per sq. foot – $1.10 per sq. foot)
×
146,000
sq. feet
=
$7,300 F
=
×
=
×
=
$6,600 U
(AC ̶ SC)
=
×
=
$410 U
=
×
=
$1,540 F
×
20,000 fenders
=
520 standard DLHr
E23-19 (continued)
There may be trade-offs between the direct materials cost variance and the direct materials efficiency
variance. Decisions made by the purchasing manager may affect the direct materials efficiency variance
for the production manager. Pro Fender’s purchasing manager may have purchased lower quality (less
expensive) direct materials, leading to the $7,300 favorable direct materials cost variance (the $1.05
E23-20 Computing overhead variances
Learning Objective 4
1. FOH Vol. Var. $1,720 U
Grand Fender is a competitor of Pro Fender from Exercise E23-19. Grand Fender also uses a standard
cost system and provides the following information:
Grand Fender allocates manufacturing overhead to production based on standard direct labor hours.
Grand Fender reported the following actual results for 2016: actual number of fenders produced, 20,000;
actual variable overhead, $5,200; actual fixed overhead, $24,000; actual direct labor hours, 480.
Requirements
1. Compute the overhead variances for the year: variable overhead cost variance, variable overhead
efficiency variance, fixed overhead cost variance, and fixed overhead volume variance.
2. Explain why the variances are favorable or unfavorable.
SOLUTION
Requirement 1
Standard VOH
allocation rate
=
Budgeted VOH
Budgeted allocation base
allocation rate
Budgeted allocation base
=
$10 per DLHr
E23-20, cont.
Requirement 1, cont.
FOH Cost Variance
=
Actual FOH
̶
Budgeted FOH
=
$24,000
̶
$22,520
=
$1,480 U
=
Budgeted FOH
̶
Allocated FOH
=
$22,520
̶
=
$1,720 U
×
520 DLHr
=
$20,800
Requirement 2
The $400 unfavorable variable overhead cost variance indicates that actual variable overhead cost per
direct labor hour was not kept within standard. The $10.83(c) actual cost per direct labor hour was greater
than the $10.00 standard cost per direct labor hour (the standard variable overhead allocation rate per
direct labor hour).
$5,200
480 DLHr
=
$10.83 rounded
E23-21 Calculating overhead variances
Learning Objective 4
1. VOH Cost Var. $450 U
Good Deal, Inc. is a competitor of Bargain, Inc. from Exercise E23-18. Good Deal also uses a standard
cost system and provides the following information:
Good Deal allocates manufacturing overhead to production based on standard direct labor hours. Good
Deal reported the following actual results for 2016: actual number of units produced, 1,000; actual
variable overhead, $2,400; actual fixed overhead, $2,900; actual direct labor hours, 1,300.
Requirements
1. Compute the variable overhead cost and efficiency variances and fixed overhead cost and volume
variances.
2. Explain why the variances are favorable or unfavorable.
SOLUTION
Requirement 1
Standard VOH
allocation rate
=
Budgeted VOH
Budgeted allocation base
allocation rate
Budgeted allocation base
=
$1.50 per DLHr
E23-21, cont.
Requirement 1, cont.
FOH Cost Variance
=
Actual FOH
̶
Budgeted FOH
=
$2,900
̶
$1,600
=
$1,300 U
=
̶
Allocated FOH
=
$1,600
̶
=
$2,400 F
×
2,000 DLHr
=
$4,000
Requirement 2
The $450 unfavorable variable overhead cost variance indicates that actual variable overhead cost per
direct labor hour was not kept within standard. The $1.85(a) actual cost per direct labor hour was greater
than the $1.50 standard cost per direct labor hour (the standard variable overhead allocation rate per
direct labor hour).
$2,400
1,300 DLHr
=
$1.85 rounded
E23-22 Preparing a standard cost income statement
Learning Objective 6
GP $244,300
The May 2016 revenue and cost information for Austin Outfitters, Inc. follows:
Prepare a standard cost income statement for management through gross profit. Report all standard cost
variances for management’s use. Has management done a good or poor job of controlling costs?
Explain.
SOLUTION
AUSTIN OUTFITTERS, INC.
Standard Cost Income Statement
For the Month Ended May 31, 2016
Sales Revenue at standard
$ 580,000
Cost of Goods Sold at standard
$ 343,000
Manufacturing Cost Variances:
Cost of Goods Sold at actual
Gross Profit
$ 244,300
The $1,200 favorable direct materials cost variance indicates that management did a good job keeping
actual direct materials cost per unit within standard. The actual cost per unit was less than the standard
cost per unit.
The $6,000 favorable direct materials efficiency variance indicates that management did a good job
keeping actual usage of direct materials within standard. The total quantity of direct materials actually
used was less than the total allowed to manufacture the actual total number of units.
E23-22, cont.
The $1,500 unfavorable variable overhead efficiency variance indicates that management did not do a
good job keeping actual usage of the allocation base for variable overhead within standard. The total
quantity of the allocation base actually used was greater than the total allowed to manufacture the actual
total number of units.
E23-23 Preparing journal entries
Learning Objective 6
MOH Adj. $1,500 DR
Hayesville Company uses a standard cost system and reports the following information for 2016:
Hayesville Company reported the following variances:
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Raw Materials Inventory ($1.05/yard × 2,700 yards)
2,835
Direct Materials Cost Variance
135
Accounts Payable ($1.10/yard × 2,700 yards)
2,970
Purchased direct materials.
Work-in-Process Inventory ($1.05/yard × 3,000 yards)
3,150
Direct Materials Efficiency Variance
315
Raw Materials Inventory ($1.05/yard × 2,700 yards)
2,835
Used direct materials.
Work-in-Process Inventory ($10.25/DLHr × 2,000 DLHr)
20,500
Direct Labor Cost Variance
650
Direct Labor Efficiency Variance
7,175
Wages Payable ($9.75/DLHr × 1,300 DLHr)
12,675
Direct labor costs incurred.
Manufacturing Overhead ($4,000 VOH + $2,500 FOH)
6,500
Various Accounts
6,500
Manufacturing overhead costs incurred.
Work-in-Process Inventory ($4/DLHr × 2,000 DLHr)
8,000
Manufacturing Overhead
8,000
Manufacturing overhead costs allocated.
Finished Goods Inventory ($3,150 + $20,500 + $8,000)
31,650
31,650
Completed goods transferred.
Cost of Goods Sold
31,650
Finished Goods Inventory
31,650
Cost of sales at standard cost.
Manufacturing Overhead
1,500
Variable Overhead Cost Variance
1,400
Fixed Overhead Cost Variance
200
Variable Overhead Efficiency Variance
1,400
Fixed Overhead Volume Variance
1,700
To adjust Manufacturing Overhead.