Chapter 6 Solutions
CHAPTER 6
Performance Evaluation: Variance Analysis
Learning Objectives
- Prepare a flexible budget and explain its use in evaluating performance. (Unit 6.1)
- Calculate the direct materials price and quantity variances. (Unit 6.2)
- Identify potential causes of the direct materials price and quantity variances. (Unit 6.2)
- Calculate the direct labor rate and efficiency variances. (Unit 6.3)
- Identify potential causes of the direct labor rate and efficiency variances. (Unit 6.3)
- Calculate the variable overhead spending and efficiency variances. (Unit 6.4)
- Calculate the fixed overhead spending variance. (Unit 6.4)
- Identify potential causes of the variable overhead spending and efficiency variances and the fixed overhead spending variance. (Unit 6.4)
Summary of End of Chapter Material by Learning Objective and Bloom’s Taxonomy
Puzzle Clues / Exercises / Problems / CasesItem / L.O. / Bloom / Item / L.O. / Bloom / Item / L.O. / Bloom / Item / L.O. / Bloom
Unit 6.1 / 6-1 / 1 / AP / 6-22 / 1 / AP,AN / 6-27 / 1 / AP,AN,C
1 / 1 / K / 6-2 / 1 / AP / 6-23 / 3,5 / AN / 6-28 / 3,4,5 / AP,AN,E
2 / 1 / K / 6-3 / 1 / AP / 6-24 / 6,7,8 / AP / 6-29 / 1,2,3,4,
5,6,8 / AP,AN,S
3 / 1 / K / 6-4 / 2 / AP / 6-25 / 1,2,3,4,
5,6,7,8 / AP,AN,S
4 / 1 / K,C / 6-5 / 2 / AP / 6-26 / 2,3,4,
5,6,7,8 / AP,AN
5 / 1 / K / 6-6 / 2 / AP
6-7 / 2 / AP
Unit 6.2 / 6-8 / 2 / AP
1 / 2 / K / 6-9 / 2 / AP
2 / 2 / K / 6-10 / 3 / AN
3 / 2 / K / 6-11 / 2, 3 / AP,AN
4 / 2 / C / 6-12 / 4 / AP
5 / 3 / C / 6-13 / 4 / AP
6 / 3 / C / 6-14 / 4 / AP
6-15 / 4 / AP
Unit 6.3 / 6-16 / 4 / AP
1 / 4 / K / 6-17 / 4 / AP
2 / 4 / K / 6-18 / 4,5 / AP,AN
3 / 5 / C / 6-19 / 6 / AP
4 / 5 / C / 6-20 / 7 / AP
6-21 / 2,4,6,7 / AP
Unit 6.4
1 / 6 / K
2 / 6 / K
3 / 7 / K
4 / 8 / C
5 / 8 / C
SOLUTIONS TO PUZZLE CLUES
Unit 6.1
1.A static budget is a budget developed for a single level of expected output. The master budget is an example of a static budget. It is prepared before the beginning of an accounting period.
LO: 1, Bloom: K, Unit: 6-1, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Budget Preparation
2.A variance is any difference between actual results and budgeted results. A favorable variance is a variance that increases operating income relative to the budgeted amount. An unfavorable variance is a variance that decreases operating income relative to the budgeted amount.
LO: 1, Bloom: K, Unit: 6-1, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Performance Management
3.Management by exception requires managers to investigate only those variances that are considered material. Materiality can be measured in terms of absolute dollars, percentages, or trends. Both favorable and unfavorable variances that are material are investigated.
LO: 1, Bloom: K, Unit: 6-1, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Performance Management
4.A flexible budget is a budget that can be prepared before an accounting period to show the operating income that is expected at various potential levels of output. A flexible budget can also be prepared after a budget period is over to reflect expected results at the actual level of output. In this instance, a flexible budget differs from a static budget in that it is prepared at the actual level of output rather than the original budgeted level of output.
LO: 1, Bloom: K,C, Unit: 6-1, Difficulty: Easy, Min: 4, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Budget Preparation
5.A static budget variance can be separated into a flexible budget variance and a sales volume variance. The flexible budget variance is the difference between actual results and the flexible budget prepared for the actual level of output. The sales volume variance is the difference between the flexible budget prepared for the actual level of output and the static budget.
LO: 1, Bloom: K, Unit: 6-1, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
Unit 6.2
1.A direct materials price variance is the difference between the actual price paid for materials purchased and the standard price of those materials, multiplied by the actual quantity of materials purchased. In equation form, it is calculated as AQPurch × (AP – SP), where AQPurch= the actual quantity purchased, AP = the actual price paid per unit of material, and SP = the standard price allowed per unit of material.
LO: 2, Bloom: K, Unit: 6-2, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
2.A direct materials quantity variance is the difference between the actual quantity of materials used and the standard quantity of materials allowed for actual production, multiplied by the standard price per material. In equation form, it is calculated as SP × (AQUsed – SQ),where SP = the standard price allowed per unit of material, AQUsed = the actual quantity of materials used in production, and SQ = the standard quantity of materials allowed for the actual production level.
LO: 2, Bloom: K, Unit: 6-2, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
3.The standard quantity allowed is the amount of inputs allowed for the actual level of production. It is computed as the standard quantity per unit multiplied by the number of units produced.
LO: 2, Bloom: K, Unit: 6-2, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
4.The standard quantity of tires for 8 bicycles is 16 tires. Standard quantity is based on the actual level of production, not the budgeted level of production.
LO: 2, Bloom: C, Unit: 6-2, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
5.A difference in the quality of materials purchased will likely result in a materials price variance. For example, higher quality materials typically cost more, resulting in an unfavorable price variance. Another reason for a material price variance is receiving (or losing) volume discounts unexpectedly.
LO: 3, Bloom: C, Unit: 6-2, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
6.A difference in the quality of materials purchased will likely result in a materials quantity variance. For example, higher quality materials typically require the use of fewer materials per unit, resulting in a favorable quantity variance. Other reasons for a material quantity variance are the expertise of the workers and the precision of the machines used in production.
LO: 3, Bloom: C, Unit: 6-2, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
Unit 6.3
1.A direct labor rate variance is the difference between the actual wage rate and the standard wage rate, multiplied by the actual hours worked. In equation form, it is calculated as AQ × (AP – SP), where AQ = the actual direct labor hours worked, AP = the actual wage rate paid, and SP = the standard wage rate.
LO: 4, Bloom: K, Unit: 6-3, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
2.A labor efficiency variance is the difference between the actual hours worked and the hours allowed for actual production, multiplied by the standard wage rate. In equation form, it is calculated as SP × (AQ – SQ),where SP = the standard wage rate, AQ = the actual number of direct labor hours used in production, and SQ = the standard total direct labor hours allowed for the actual production level.
LO: 4, Bloom: K, Unit: 6-3, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
3.Actual labor rates might differ from standard rates if a different skill class of worker is used. For example, if not enough level 1 workers are available to complete the work, an operations manager may decide to use level 2 workers. The level 2 workers get paid a higher rate per hour, so the labor rate variance would be unfavorable. Another reason for a labor rate variance is unexpected overtime resulting in workers getting paid time and a half.
LO: 5, Bloom: C, Unit: 6-3, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
4.Actual labor hours might differ from standard hours if a different skill class of worker is used. For example if not enough level 1 workers are available to complete production, an operations manager may decide to use level 2 workers. The level 2 workers are more skilled and work more efficiently, so the labor efficiency variance would be favorable. Other reasons for a labor efficiency variance include a difference in the quality of materials and the precision of production equipment.
LO: 5, Bloom: C, Unit: 6-3, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
Unit 6.4
1.A variable overhead spending variance is the difference between the actual amount spent on variable overhead items and the amount of variable overhead that is expected to be incurred at the actual level of the activity base. Actual VOH – (AQ SP)
LO: 6, Bloom: K, Unit: 6-4, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
2.The variable overhead efficiency is the difference between the actual quantity of the activity base and the standard quantity of the activity base allowed for actual production, multiplied by the standard variable overhead rate. The variance captures the effect of the efficient use of the activity base. SP (AQ – SQ)
LO: 6, Bloom: K, Unit: 6-4, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
3.The fixed overhead spending variance is the difference between the actual amount spent on fixed overhead items and the budgeted amount of fixed overhead.
LO: 7, Bloom: K, Unit: 6-4, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
4.Paying more or less than expected on the overhead items will cause spending variances. For variable overhead, efficient or inefficient use of variable overhead items (such as indirect materials) can cause a spending variance.
LO: 8, Bloom: C, Unit: 6-4, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
5.A variable overhead efficiency is strictly due to the use of the activity base that is used to apply variable overhead. If the activity base is used efficiently (inefficiently), then the variable overhead efficiency variance will be favorable (unfavorable).
LO: 8, Bloom: C, Unit: 6-4, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
SOLUTIONS TO EXERCISES
Exercise 6-1
Unit / 1,500 / 2,500 / 3,500Revenue / $50.00a / $75,000 / $125,000 / $175,000
Less variable expenses:
Cost of goods sold / 30.00b / 45,000 / 75,000 / 105,000
Operating expenses / 3.50c / 5,250 / 8,750 / 12,250
Total variable expenses / $33.50 / 50,250 / 83,750 / 117,250
Contribution margin / $16.50 / 24,750 / 41,250 / 57,750
Fixed operating expensesd / 28,000 / 28,000 / 28,000
Operating income / ($3,250) / $13,250 / $29,750
a
b
c
d$35,000 × 0.80
LO: 1, Bloom: AP, Unit: 6-1, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation
Exercise 6-2
1
Chapter 6 Solutions
Exercise 6-3
Actual Results / Flexible Budget Variance / Flexible Budget / Sales Volume Variance / Static BudgetUnit sales / 3,100 / 0 / 3,100 / 100 F / 3,000
Revenue / $2,635,000 / $155,000 F / $2,480,000 / $80,000 F / $2,400,000
Less variable expenses:
Direct material / 910,000 / 20,000 F / 930,000 / 30,000 U / 900,000
Direct labor / 435,000 / 30,000 F / 465,000 / 15,000 U / 450,000
Overhead / 398,000 / 10,500 U / 387,500 / 12,500 U / 375,000
Total variable expenses / 1,743,000 / 39,500 F / 1,782,500 / 57,500 U / 1,725,000
Contribution margin / 892,000 / 194,500 F / 697,500 / 22,500 F / 675,000
Total fixed expenses / 125,000 / 8,000 U / 117,000 / 0 / 117,000
Operating income / $ 767,000 / $186,500 F / $ 580,500 / $22,500 F / $ 558,000
LO: 1, Bloom: AP, Unit: 6-1, Difficulty: Moderate, Min: 15-20, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
1
Chapter 6 Solutions
Exercise 6-4
AQ × AP / AQ × SP4,000 lbs. × AP / 4,000 lbs. × $1.60/lb.
$6,800 / $6,400
$400 U
Direct materials price variance
LO: 2, Bloom: AP, Unit: 6-2, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
Exercise 6-5
AQ × AP / AQ × SP1,100 oz. × AP / 1,100 oz. × $800/oz.
$875,000 / $880,000
$5,000 F
Direct materials price variance
LO: 2, Bloom: AP, Unit: 6-2, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
Exercise 6-6
AQ × AP / AQ × SP50,000 gallons × $2.50/gallon / 50,000 gallons × SP
$125,000
$5,000 F
$125,000 – (50,000 gal. × SP) = / -$5,000
$130,000 = / 50,000 gal. × SP
= / SP
$2.60/gal. = / SP
LO: 2, Bloom: AP, Unit: 6-2, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
Exercise 6-7
AQ × SP / SQ × SP535,000 ft. × $.23/ft. / (63,000 cables × 8.5 ft.) × $.23/ft.
535,500 ft. × $.23/ft.
$123,050 / $123,165
$115 F
Direct materials quantity variance
LO: 2, Bloom: AP, Unit: 6-2, Difficulty: Difficult, Min: 5, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
Exercise 6-8
AQ × SP / SQ × SP800 suits × 1.2 yds. × $5/yd.
1,025 yds. × $5/yd. / 960 yds. × $5/yd.
$5,125 / $4,800
$325 U
Direct materials quantity variance
LO: 2, Bloom: AP, Unit: 6-2, Difficulty: Difficult, Min: 5, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
Exercise 6-9
AQ × SP / SQ × SP40,000 oz. × $.20/oz. / # tests × 0.5 oz. × $.20/oz.
$8,000
$500 U
Direct materials quantity variance
$8,000 – (# tests × $.10) = / $500
$7,500 = / # tests × $.10
= / # tests
75,000 = / # tests
LO: 2, Bloom: AP, Unit: 6-2, Difficulty: Difficult, Min: 8, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
Exercise 6-10
Purchasing from 12 vendors rather than a single vendor likely will result in an unfavorable price variance. Sourcing from a single vendor probably allowed Montrose to contract at a lower price as a result of volume purchasing, something that Montrose cannot achieve when purchases are spread among 12 vendors. The unfavorable direction of the price variance is also likely given small quantity purchases requiring overnight delivery and the three purchases of higher quality material.
The implications for the quantity variance are not as clear. The three higher quality purchases would tend to yield a favorable quantity variance, since higher quality materials often require fewer inputs to produce a unit of product. If other purchases were of standard quality, the total quantity variance would likely be favorable, although the size will depend on the relative size of the higher quality orders.
LO: 3, Bloom: AN, Unit: 6-2, Difficulty: Difficult, Min: 10-15, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Performance Management
Exercise 6-11
a.Direct materials price variance
AQ × AP / AQ × SP6,000 lbs. purchased × $7.70/lb. / 6,000 lbs. purchased × $8/lb.
$46,200 / $48,000
$1,800 F
Direct materials quantity variance
AQ × SP / SQ × SP5,040 lbs. used × $8/lb. / (2,800 boxes × 1.5 lbs.) × $8/lb.
4,200 lbs. × $8/lb.
$40,320 / $33,600
$6,720 U
Exercise 6-11 continued
b.Chad’s Chocolates appears to have purchased a lower quality chocolate at a lower price than the standard specified. The lower quality chocolate does not appear to have processed as well as the standard quality, requiring additional chocolate to complete the production run.
LO: 2,3, Bloom: AP, AN, Unit: 6-2, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
Exercise 6-12
AQ × AP / AQ × SP50,300 DLH × $6.75/DLH
$352,100 / $339,525
$12,575 U
Direct labor rate variance
LO: 4, Bloom: AP, Unit: 6-3, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
Exercise 6-13
AQ × AP / AQ × SP10,800 DLH × AP / 10,800 DLH × $8.40/DLH
$88,000 / $90,720
$2,720 F
Direct labor rate variance
LO: 4, Bloom: AP, Unit: 6-3, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
Exercise 6-14
AQ × AP / AQ × SP$33,400 / AQ × $8/DLH
$1,400 U
Direct labor rate variance
$33,400 – (AQ × $8) = / $1,400
$32,000 = / AQ × $8
= / AQ
4,000 DLH = / AQ
LO: 4, Bloom: AP, Unit: 6-3, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
Exercise 6-15
Actual DLH worked = 25,000 + 800 = 25,800
Standard wage rate = $9.25 - $0.50 = $8.75 per DLH
AQ × SP / SQ × SP25,800 DLH × $8.75/DLH / 25,000 DLH × $8.75/DLH
$225,750 / $218,750
$7,000 U
Direct labor efficiency variance
LO: 4, Bloom: AP, Unit: 6-3, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
Exercise 6-16
AQ × SP / SQ × SP7,200 DLH × $9/DLH / (420,000 balls × DLH/ball) × $9/DLH
7,000 DLH × $9/DLH
$64,800 / $63,000
$1,800 U
Direct labor efficiency variance
LO: 4, Bloom: AP, Unit: 6-3, Difficulty: Difficult, Min: 5, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
Exercise 6-17
AQ × SP / SQ × SPAQ × $6.50/DLH / (50,000 reams × .25 DLH/ream) × $6.50/DLH
12,500 DLH × $6.50/DLH
$81,250
$1,300 F
Direct labor efficiency variance
(AQ × $6.50) – $81,250 = / -$1,300
(AQ × $6.50) = / $79,950
AQ = /
AQ = / 12,300 DLH
LO: 4, Bloom: AP, Unit: 6-3, Difficulty: Difficult, Min: 8, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
1
Chapter 6 Solutions
Exercise 6-18
a.
AQ × AP / AQ × SP / SQ × SP24,320 DLH × $15/DLH / 24,320 DLH × $14/DLH / (6,400 cellos × 4 DLH) × $14/DLH
25,600 DLH × $14/DLH
$364,800 / $340,480 / $358,400
$24,320 U / $17,920 F
Direct labor rate variance / Direct labor efficiency variance
b.Hunter may have hired workers who had a higher level of skill than its normal workers. The company had to pay a higher price than normal for this higher skill level, resulting in an unfavorable labor rate variance. The higher skill level resulted in the workers being more efficient and requiring fewer DLH to produce the cellos, resulting in the favorable direct labor efficiency variance.
LO: 4,5, Bloom: AP, AN, Unit: 6-3, Difficulty: Difficult, Min: 12, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
Exercise 6-19
AQ × AP / AQ × SP / SQ × SP19,500 DLH × $3/DLH / (12,320 pkgs. × 1.5 DLH) × $3/DLH
18,480 DLH × $3/DLH
$50,000 / $58,500 / $55,440
$8,500 F / $3,060 U
Variable overhead spending variance / Variable overhead efficiency variance
LO: 6, Bloom: AP, Unit: 6-4, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
1
Chapter 6 Solutions
Exercise 6-20
Actual / Budget$485,000 / $500,000
$15,000 F
LO: 7, Bloom: AP, Unit: 6-4, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Management
Exercise 6-21
1
Chapter 6 Solutions
SOLUTIONS TO PROBLEMS
Problem 6-22
a.
Unit / 180,000 gamesRevenue / $16.00 / $2,880,000
Less variable expenses:
Direct materiala / 4.50 / 810,000
Direct laborb / 2.00 / 360,000
Variable overheadc / 3.00 / 540,000
Total variable expenses / 9.50 / 1,710,000
Contribution margin / $6.50 / 1,170,000
Less fixed expenses
Overhead / 250,000
Selling and administrative / 500,000
Total fixed expenses / 750,000
Operating income / $420,000
a
b
c
b.
Actual Results / Static Budget Variance / Static BudgetUnit Sales / 180,000 / 30,000 F / 150,000
Revenue / $2,870,000 / $470,000 F / $2,400,000
Less variable expenses:
Direct material / 798,000 / 123,000 U / 675,000
Direct labor / 375,000 / 75,000 U / 300,000
Overhead / 550,000 / 100,000 U / 450,000
Total variable expenses / 1,723,000 / 298,000 U / 1,425,000
Contribution margin / 1,147,000 / 172,000 F / 975,000
Less fixed expenses
Overhead / 270,000 / 20,000 U / 250,000
Selling and administrative / 500,000 / 0 / 500,000
Total fixed expenses / 770,000 / 20,000 U / 750,000
Operating income / $377,000 / $152,000F / $225,000
c.No, the static budget variance is of little use to managers. It is impossible to determine from the static budget variance whether the variances are due to changes in prices or changes in volume.
1
Chapter 6 Solutions
Problem 6-22 continued
d.
Actual Results / Flexible Budget Variance / Flexible Budget / Sales Volume Variance / Static BudgetUnit Sales / 180,000 / 0 / 180,000 / 30,000 F / 150,000
Revenue / $2,870,000 / $10,000 U / $2,880,000 / $480,000 F / $2,400,000
Less variable expenses:
Direct material / 798,000 / 12,000 F / 810,000 / 135,000 U / 675,000
Direct labor / 375,000 / 15,000 U / 360,000 / 60,000 U / 300,000
Overhead / 550,000 / 10,000 U / 540,000 / 90,000 U / 450,000
Total variable expenses / 1,723,000 / 13,000 U / 1,710,000 / 285,000 U / 1,425,000
Contribution margin / 1,147,000 / 23,000 U / 1,170,000 / 195,000 F / 975,000
Less fixed expenses:
Overhead / 270,000 / 20,000 U / 250,000 / 250,000
Selling & administrative / 500,000 / 500,000 / 0 / 500,000
Total fixed expenses / 770,000 / 20,000 U / 750,000 / 0 / 750,000
Operating income / $377,000 / $43,000 U / $420,000 / $195,000 F / $225,000
e.The flexible budget suggests that if budget objectives had been met with higher sales, the operating income should have been $420,000. In fact, operating income was only $377,000. It appears that the average sales price had to be reduced to sell more units. While direct materials costs came in under budget, direct labor and variable overhead costs exceeded budget. Maybe overtime was worked or lesser skilled workers had to be hired to achieve the higher level of production/sales. Management needs to identify why costs increased to be able to anticipate future results.
LO: 1, Bloom: AP, AN, Unit: 6-1, Difficulty: Difficult, Min: 35-40, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation, Performance Management