Assignment Material

Questions

  1. 7-1. What is the relationship between management by exception and variance analysis?
  2. 7-2. What are two possible sources of information a company might use to compute the budgeted amount in variance analysis?
  3. 7-3. Distinguish between a favorable variance and an unfavorable variance.
  4. 7-4. What is the key difference between a static budget and a flexible budget?
  5. 7-5. Why might a flexible-budget analysis be more informative than a static-budget analysis?
  6. 7-6. Describe the steps in developing a flexible budget.
  7. 7-7. List four reasons for using standard costs.
  8. 7-8. How might a manager get insight into the causes of a direct materials flexible-budget variance?
  9. 7-9. List three causes of a favorable direct materials price variance.
  10. 7-10. Describe three reasons for an unfavorable direct manufacturing labor efficiency variance.
  11. 7-11. How does variance analysis help in continuous improvement?
  12. 7-12. Why might an analyst examining variances in the production area look beyond that business function for explanations of those variances?
  13. 7-13. Comment on the following statement by a plant manager: “Meetings with my plant accountant are frustrating. All he wants to do is pin the blame on someone for the variances he reports.”
  14. 7-14. When inputs are substitutable, how can the direct materials efficiency variance be decomposed further to obtain useful information?
  15. 7-15. “Benchmarking against other companies enables a company to identify the lowest-cost producer. This amount should become the performance measure for next year.” Do you agree?

Multiple-Choice Questions

In partnership with Becker professional education
  1. 7-16. Metal Shelf Company’s standard cost for raw materials is $4.00 per pound and it is expected that each metal shelf uses two pounds of material. During October Year 2, 25,000 pounds of materials are purchased from a new supplier for $97,000 and 13,000 shelves are produced using 27,000 pounds of materials. Which statement is a possible explanation concerning the direct materials variances?
    1. a. The production department had to use more materials since the quality of the materials was inferior.
    2. b. The purchasing manager paid more than expected for materials.
    3. c. Production workers were more efficient than anticipated.
    4. d. The overall materials variance is positive; no further analysis is necessary.
  2. 7-17. All of the following statements regarding standards are accurate except:
    1. a. Standards allow management to budget at a per-unit level.
    2. b. Ideal standards account for a minimal amount of normal spoilage.
    3. c. Participative standards usually take longer to implement than authoritative standards.
    4. d. Currently attainable standards take into account the level of training available to employees.
  3. 7-18. Amalgamated Manipulation Manufacturing’s (AMM) standards anticipate that there will be 3 pounds of raw material used for every unit of finished goods produced. AMM began the month of May with 5,000 pounds of raw material, purchased 15,000 pounds for $19,500 and ended the month with 4,000 pounds on hand. The company produced 5,000 units of finished goods. The company estimates standard costs at $1.50 per pound. The materials price and efficiency variances for the month of May were as follows:
<p>A table shows materials price and efficiency variances for the month of May for Amalgamated Manipulation Manufacturing</p>

The table depicts materials price and efficiency variances for the month of May for Amalgamated Manipulation Manufacturing. The details of the table are as follows:

1.

2.

3.

4.

  1. 7-19. Atlantic Company has a manufacturing facility in Brooklyn that manufactures robotic equipment for the auto industry. For Year 1, Atlantic collected the following information from its main production line:
<p>A table shows main production line information from Atlantic Company.</p>

The table depicts main production line information from Atlantic Company. The details of the table are as follows:

1. Actual quantity purchased: 200 units

2. Actual quantity used: 110 units

3. Standard quantity for units produced: 100 units

4. Actual price paid: 8 dollars per unit

5. Standard price: 10 dollars per unit

  1. Atlantic isolates price variances at the time of purchase. What is the materials price variance for Year 1?
    1. 1. $400 favorable
    2. 2. $400 unfavorable
    3. 3. $220 favorable
    4. 4. $220 unfavorable
  1. 7-20. Basix Inc. calculates direct manufacturing labor variances and has the following information:
    1. 1. Actual hours worked: 200
    2. 2. Standard hours allowed for actual output: 250
    3. 3. Actual rate per hour: $12
    4. 4. Standard rate per hour: $10
  2. Given the information above, which of the following is correct regarding direct manufacturing labor variances?
    1. a. The price and efficiency variances are favorable.
    2. b. The price and efficiency variances are unfavorable.
    3. c. The price variance is favorable, while the efficiency variance is unfavorable.
    4. d. The price variance is unfavorable, while the efficiency variance is favorable.

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Exercises

  1. 7-21. FLEXIBLE BUDGET. Brabham Enterprises manufactures tires for the Formula I motor racing circuit. For August 2020, it budgeted to manufacture and sell 3,000 tires at a variable cost of $73 per tire and total fixed costs of $57,000. The budgeted selling price was $111 per tire. Actual results in August 2020 were 2,700 tires manufactured and sold at a selling price of $113 per tire. The actual total variable costs were $218,700, and the actual total fixed costs were $53,500.
    1. Required
    2. 1. Prepare a performance report (akin to Exhibit 7-2) with a flexible budget and a static budget.
    3. 2. Comment on the results in requirement 1.
  2. 7-22. FLEXIBLE BUDGET. Bryant Company’s budgeted prices for direct materials, direct manufacturing labor, and direct marketing (distribution) labor per attaché case are $43, $6, and $13, respectively. The president is pleased with the following performance report:
Actual CostsStatic BudgetVariance
Direct materials$438,000$473,000$35,000 F
Direct manufacturing labor    63,600    66,000    2,400 F
Direct marketing (distribution) labor  133,500  143,000     9,500 F
  1. Actual output was 10,000 attaché cases. Assume all three direct-cost items shown are variable costs.
  2. Required
  3. Is the president’s pleasure justified? Prepare a revised performance report that uses a flexible budget and a static budget.
  4. 7-23. FLEXIBLE-BUDGET PREPARATION AND ANALYSIS. Bank Management Printers, Inc., produces luxury checkbooks with three checks and stubs per page. Each checkbook is designed for an individual customer and is ordered through the customer’s bank. The company’s operating budget for September 2020 included these data:
<p>A table shows the operating budget for September 2020 for Bank Management Printers, Inc.</p>

The table depicts the operating budget for September 2020 for Bank Management Printers, Inc. The details of the table are as follows:

1. Number of checkbooks: 15,000

2. Selling price per book: 20 dollars

3. Variable cost per book: 8 dollars

4. Fixed costs for the month: 145,000 dollars

  1. The actual results for September 2020 were as follows:
<p>A table shows the actual results for September 2020 for Bank Management Printers, Inc.</p>

The table depicts the actual results for September 2020 for Bank Management Printers, Inc. The details of the table are as follows:

1. Number of checkbooks produced and sold: 12,000

2. Average selling price per book: 21 dollars

3. Variable cost per book: 7 dollars

4. Fixed costs for the month: 150,000 dollars

  1. The executive vice president of the company observed that the operating income for September was much lower than anticipated, despite a higher-than-budgeted selling price and a lower-than-budgeted variable cost per unit. As the company’s management accountant, you have been asked to provide explanations for the disappointing September results.
  2. Bank Management develops its flexible budget on the basis of budgeted per-output-unit revenue and per-output-unit variable costs without detailed analysis of budgeted inputs.
    1. Required
    2. 1. Prepare a static-budget-based variance analysis of the September performance.
    3. 2. Prepare a flexible-budget-based variance analysis of the September performance.
    4. 3. Why might Bank Management find the flexible-budget-based variance analysis more informative than the static-budget-based variance analysis? Explain your answer.
  1. 7-24. FLEXIBLE BUDGET, WORKING BACKWARD. The Edinburgh Company produces engine parts for car manufacturers. A new accountant intern at Edinburgh has accidentally deleted the company’s variance analysis calculations for the year ended December 31, 2020. The following table is what remains of the data.
<p>A table shows partial data for Edinburgh Company</p>

Performance Report, Year Ended December 31, 2020 is as follows:

1. Units sold

2. Revenues

3. Variable costs

4. Contribution margin

5. Fixed costs

6. Operating income

    1. Required
    2. 1. Calculate all the variances in the preceding table. (If your work is accurate, you will find that the total static-budget variance is $0.)
    3. 2. What are the actual and budgeted selling prices? What are the actual and budgeted variable costs per unit?
    4. 3. Review the variances you have calculated and discuss possible causes and potential problems. What is the important lesson learned here?
  1. 7-25. FLEXIBLE-BUDGET AND SALES VOLUME VARIANCES. Cascade, Inc., produces the basic fillings used in many popular frozen desserts and treats—vanilla and chocolate ice creams, puddings, meringues, and fudge. Cascade uses standard costing and carries over no inventory from one month to the next. The ice-cream product group’s results for June 2020 were as follows:
<p>A table shows June 2020 results for Cascade, Inc.</p>

Performance Report, June 2020 is as follows:

1. Units (pounds

2. Revenues

3. Variable manufacturing costs

4. Contribution margin

  1. Jeff Geller, the business manager for ice-cream products, is pleased that more pounds of ice cream were sold than budgeted and that revenues were up. Unfortunately, variable manufacturing costs went up, too. The bottom line is that contribution margin declined by $52,900, which is just over 2% of the budgeted revenues of $2,592,600. Overall, Geller feels that the business is running fine.
    1. Required
    2. 1. Calculate the static-budget variance in units, revenues, variable manufacturing costs, and contribution margin. What percentage is each static-budget variance relative to its static-budget amount?
    3. 2. Break down each static-budget variance into a flexible-budget variance and a sales-volume variance.
    4. 3. Calculate the selling-price variance.
    5. 4. Assume the role of management accountant at Cascade. How would you present the results to Jeff Geller? Should he be more concerned? If so, why?
  2. 7-26. PRICE AND EFFICIENCY VARIANCES. Sunshine Foods manufactures pumpkin scones. For January 2020, it budgeted to purchase and use 14,750 pounds of pumpkin at $0.92 a pound. Actual purchases and usage for January 2020 were 16,000 pounds at $0.85 a pound. Sunshine budgeted for 59,000 pumpkin scones. Actual output was 59,200 pumpkin scones.
    1. Required
    2. 1. Compute the flexible-budget variance.
    3. 2. Compute the price and efficiency variances.
    4. 3. Comment on the results for requirements 1 and 2 and provide a possible explanation for them.
  1. 7-27. MATERIALS AND MANUFACTURING LABOR VARIANCES. Consider the following data collected for Great Homes, Inc.:
Direct MaterialsDirect Manufacturing Labor
Cost incurred: Actual inputs × actual prices$200,000$90,000
Actual inputs × standard prices 214,000  86,000
Standard inputs allowed for actual output × standard prices  225,000  80,000
  1. Required
  2. Compute the price, efficiency, and flexible-budget variances for direct materials and direct manufacturing labor.
  3. 7-28. DIRECT MATERIALS AND DIRECT MANUFACTURING LABOR VARIANCES. Rugged Life, Inc., designs and manufactures fleece quarter-zip jackets. It sells its jackets to brand-name outdoor outfitters in lots of one dozen. Rugged Life’s May 2020 static budget and actual results for direct inputs are as follows:
<p>A table shows May 2020 static budget for Rugged Life</p>

The table depicts May 2020 static budget for Rugged Life. The details of the table are as follows:

1. Number of jacket lots, where 1 lot equals 1 dozen jackets: 300

2. Direct materials per lot of jackets: 18 yards at 4.65 dollars per yard equals 83.70 dollars

3. Direct manufacturing labor per lot of jackets: 2.4 hours at 12.50 dollars per hour equals 30 dollars

Actual Results
Number of jacket lots sold325
<p>A table shows May 2020 total direct inputs for Rugged Life</p>

The table depicts May 2020 total direct inputs for Rugged Life. The details of the table are as follows:

1. Direct materials: 6,500 yards at 4.85 dollars per yard equals 31,525 dollars

2. Direct manufacturing labor: 715 hours at 12.60 dollars per hour equals 9,009 dollars

Total Direct Inputs:
Direct materials6,500 yards at $4.85 per yard  =  $31,525
Direct manufacturing labor 715 hours at $12.60 per hour  =    $9,009
  1. Rugged Life has a policy of analyzing all input variances when they add up to more than 8% of the total cost of materials and labor in the flexible budget, and this is true in May 2020. The production manager discusses the sources of the variances: “A new type of material was purchased in May. This led to faster cutting and sewing, but the workers used more material than usual as they learned to work with it. For now, the standards are fine.”
    1. Required
    2. 1. Calculate the direct materials and direct manufacturing labor price and efficiency variances in May 2020. What is the total flexible-budget variance for both inputs (direct materials and direct manufacturing labor) combined? What percentage is this variance of the total cost of direct materials and direct manufacturing labor in the flexible budget?
    3. 2. Comment on the May 2020 results. Would you continue the “experiment” of using the new material? 
  2. 7-29. PRICE AND EFFICIENCY VARIANCES, JOURNAL ENTRIES. The Schuyler Corporation manufactures lamps. It has set up the following standards per finished unit for direct materials and direct manufacturing labor:
Direct materials: 10 lb. at $4.50 per lb.$45.00
Direct manufacturing labor: 0.5 hour at $30 per hour  15.00
  1. The number of finished units budgeted for January 2020 was 10,000; 9,850 units were actually produced.
  2. Actual results in January 2020 were as follows:
Direct materials: 98,055 lb. used
Direct manufacturing labor: 4,900 hours$154,350
  1. Assume that there was no beginning inventory of either direct materials or finished units.
  2. During the month, materials purchased amounted to 100,000 lb., at a total cost of $465,000. Input price variances are isolated upon purchase. Input-efficiency variances are isolated at the time of usage.
    1. Required
    2. 1. Compute the January 2020 price and efficiency variances of direct materials and direct manufacturing labor.
    3. 2. Prepare journal entries to record the variances in requirement 1.
    4. 3. Comment on the January 2020 price and efficiency variances of Schuyler Corporation.
    5. 4. Why might Schuyler calculate direct materials price variances and direct materials efficiency variances with reference to different points in time?
  1. 7-30. MATERIALS AND MANUFACTURING LABOR VARIANCES, STANDARD COSTS. Dawson, Inc., is a privately held furniture manufacturer. For August 2020, Dawson had the following standards for one of its products, a wicker chair:
Standards per Chair
Direct materials3 square yards of input at $5.50 per square yard
Direct manufacturing labor0.5 hour of input at $10.50 per hour
  1. The following data were compiled regarding actual performance: actual output units (chairs) produced, 2,200; square yards of input purchased and used, 6,200; price per square yard, $5.70; direct manufacturing labor costs, $9,844; actual hours of input, 920; labor price per hour, $10.70.
    1. Required
    2. 1. Show computations of price and efficiency variances for direct materials and direct manufacturing labor. Give a plausible explanation of why each variance occurred.
    3. 2. Suppose 8,700 square yards of materials were purchased (at $5.70 per square yard), even though only 6,200 square yards were used. Suppose further that variances are identified at their most timely control point; accordingly, direct materials price variances are isolated and traced at the time of purchase to the purchasing department rather than to the production department. Compute the price and efficiency variances under this approach.
  2. 7-31. JOURNAL ENTRIES AND T-ACCOUNTS (CONTINUATION OF 7-30). Prepare journal entries and post them to T-accounts for all transactions in Exercise 7-30, including requirement 2. Summarize how these journal entries differ from the normal-costing entries described in Chapter 4.
  3. 7-32. PRICE AND EFFICIENCY VARIANCES, BENCHMARKING. Jacinta Enterprises manufactures insulated cold beverage cups printed with college and corporate logos, which it distributes nationally in lots of 12 dozen cups. In June 2020, Jacinta produced 5,000 lots of its most popular line of cups, the 24-ounce lidded tumbler, at its plant in Peoria. The production manager, Sophie Barrett, asks her assistant, John Hardy, to find out the precise per-unit actual variable costs at the Peoria plant and the variable costs of a competitor, Beverage King, who offers similar-quality tumblers at cheaper prices. Hardy pulls together the following information for each lot:
Per lotPeoria PlantBeverage King
Direct materials72 lbs. @ $3.20 per lb.70 lbs. @ $2.90 per lb.
Direct manufacturing labor2.5 hrs. @ $11 per hr.2.4 hrs. @ $10 per hr
Variable overhead$21 per lot$20 per lot
    1. Required
    2. 1. What is the actual variable cost per lot at the Peoria Plant and at Beverage King?
    3. 2. Using the Beverage King data as the standard, calculate the direct materials and direct manufacturing labor price and efficiency variances for the Peoria plant.
    4. 3. What advantage does Jacinta get by using Beverage King’s benchmark data as standards in calculating its variances? Identify two issues that Barrett should keep in mind in using the Beverage King data as the standards.
  1. 7-33. STATIC AND FLEXIBLE BUDGETS, SERVICE SECTOR. Student Finance (StuFi) is a start-up 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.
  2. 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 2020 are presented below.
<p>A table shows 2020 third quarter budgeted and actual results for Student Finance</p>

The table depicts static budget and actual results for new loans originated, average amount of loan, variable costs per loan (professional labor, credit verification, federal documentation fees, and courier services), administrative costs (fixed), and technology costs (fixed). The details of the table are as follows:

1. New loans originated

2. Average amount of loan

3. Variable costs per loan, professional labor

4. Variable costs per loan, credit verification

5. Variable costs per loan, federal documentation fees

6. Variable costs per loan, courier services

7. Administrative costs (fixed)

8. Technology costs (fixed)

    1. Required
    2. 1. Prepare StuFi’s static budget of operating income for the third quarter of 2020.
    3. 2. Prepare an analysis of variances for the third quarter of 2020 along the lines of Exhibit 7-2; identify the sales volume and flexible budget variances for operating income.
    4. 3. Compute the professional labor price and efficiency variances for the third quarter of 2020. 
    5. 4. What factors would you consider in evaluating the effectiveness of professional labor in the third quarter of 2020?  

Problems

  1. 7-34. FLEXIBLE BUDGET, DIRECT MATERIALS, AND DIRECT MANUFACTURING LABOR VARIANCES. Emerald 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 2020:
<p>A table shows information from the Emerald Statuary 2020 static budget</p>

The table depicts information from the Emerald Statuary 2020 static budget. The details of the table are as follows:

1. Expected production and sales: 7,000 units

2. Expected selling price per unit: 680 dollars

3. Total fixed costs: 1,400,000 dollars

  1. Standard quantities, standard prices, and standard unit costs follow for direct materials and direct manufacturing labor:
<p>A table shows information from the Emerald Statuary 2020 static budget</p>

The table depicts standard quantity, standard price, and standard unit cost for direct materials and direct manufacturing labor. The details of the table are as follows:

1. Direct materials

2. Direct manufacturing labor

  1. During 2020, actual number of units produced and sold was 4,800, at an average selling price of $720. Actual cost of direct materials purchased and used was $392,700 (66,000 pounds at $5.95 per pound). Actual direct manufacturing labor costs were $878,400 (18,300 actual direct manufacturing labor-hours at $48 per hour). Actual fixed costs were $1,170,000. There were no beginning or ending inventories.
    1. Required
    2. 1. Calculate the sales-volume variance and flexible-budget variance for operating income.
    3. 2. Compute price and efficiency variances for direct materials and direct manufacturing labor.
  2. 7-35. VARIANCE ANALYSIS, NONMANUFACTURING SETTING. Joyce Brown has run Medical Maids, a specialty cleaning service for medical and dental offices, for the past 10 years. Her static budget and actual results for April 2020 are shown below. Joyce has one employee who has been with her for all 10 years that she has been in business. In addition, at any given time she also employs two other less-experienced workers. It usually takes each employee 2 hours to clean an office, regardless of his or her experience. Brown pays her experienced employee $30 per office and the other two employees $15 per office. There were no wage increases in April.
<p>A table shows actual and budgeted income statements for the month ended April 30, 2020 for Medical Maids</p>

The table depicts budget and actual income statements for offices cleaned, revenue, variable costs (costs of supplies, labor, and total variable costs), contribution margin, fixed costs, and operating income. The details of the table are as follows:

1. Offices cleaned

2. Revenue

3. Variable costs, costs of supplies

4. Variable costs, labor

5. Variable costs, total variable costs

6. Contribution margin

7. Fixed costs

8. Operating income

    1. Required
    2. 1. How many offices, on average, did Brown budget for each employee? How many offices did each employee actually clean?
    3. 2. Prepare a flexible budget for April 2020.
    4. 3. Compute the sales price variance and the labor efficiency variance for each labor type.
    5. 4. What information, in addition to that provided in the income statements, would you want Brown to gather, if you wanted to improve operational efficiency?
  1. 7-36. COMPREHENSIVE VARIANCE ANALYSIS REVIEW.  Edgar Animal Health, Inc., produces a generic medication used to treat cats with feline diabetes. The liquid medication is sold in 100ml vials. Edgar employs a team of sales representatives who are paid commissions.
  2. Given the narrow margins in the generic veterinary drugs industry, Edgar relies on tight standards and cost controls to manage its operations. Edgar has the following budgeted amounts for the month of October 2020:
<p>A table shows budgeted amounts for October 2020 for Edgar Animal Health, Inc.</p>

The table depicts budgeted amounts for October 2020 for Edgar Animal Health, Inc. The details of the table are as follows:

1. Average selling price per vial: 8.00 dollars

2. Total direct materials cost per vial: 3.50 dollars

3. Direct manufacturing labor cost per hour: 15.00 dollars

4. Average labor productivity rate (vials per hour): 100

5. Sales commission cost per vial: 0.70 dollars

6. Fixed administrative and manufacturing overhead: 900,000 dollars

  1. Edgar budgeted sales of 750,000 vials for October. At the end of the month, the controller revealed that actual results for October were as follows:
  1. Calculate the following amounts for Edgar for October 2020:
    1. Required
    2. 1. Static-budget and actual operating income
    3. 2. Static-budget variance for operating income
    4. 3. Flexible-budget operating income
    5. 4. Flexible-budget variance for operating income
    6. 5. Sales-volume variance for operating income
    7. 6. Price and efficiency variances for direct manufacturing labor
    8. 7. Flexible-budget variance for direct manufacturing labor
  1. 7-37. POSSIBLE CAUSES FOR PRICE AND EFFICIENCY VARIANCES. You have been invited to interview for an internship with an international food manufacturing company. When you arrive for the interview, you are given the following information related to a fictitious chocolatier for the month of June. The chocolatier manufactures truffles in 12-piece boxes. The production is labor intensive, and the delicate nature of the chocolate requires a high degree of skill.
<p>A table shows actual amounts for a chocolatier for the month of June.</p>

The table depicts actual amounts for a chocolatier for the month of June. The details of the table are as follows:

1. Boxes produced: 10,000

2. Direct materials used in production: 13,000 pounds

3. Actual direct material cost: 78,000 dollars

4. Actual direct manufacturing labor-hours: 2,400

5. Actual direct manufacturing labor cost: 31,200 dollars

<p>A table shows standard amounts for a chocolatier for the month of June.</p>

The table depicts standards for a chocolatier for the month of June. The details of the table are as follows:

1. Purchase price of direct materials: 7 dollars per pound

2. Direct materials per box: 0.90 pounds

3. Wage rate: 15 dollars per hour

4. Boxes per hour: 6

  1. Please respond to the following questions as if you were in an interview situation:
    1. Required
    2. 1. Calculate the direct materials efficiency and price variances and the direct manufacturing labor price and efficiency variances for the month of June.
    3. 2. Discuss some possible causes of the variances you have calculated. Can you make any possible connection between the material and labor variances? What recommendations do you have for future improvement?
<p>A table shows standards for Best Bikes</p>

The table depicts standards for Best Bikes. The details of the table are as follows:

1. Cost of titanium: 18 dollars per pound

2. Titanium used per bicycle: 8 pounds

  1. 7-38. 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.
  2. Best Bikes established the following standards based upon the company’s experience with previous suppliers. The standards are as follows:
  1. Actual results for the first month using the online supplier of titanium are as follows:
<P>A table shows actual results for the first month using the online supplier of titanium for Best Bikes</P>

The table depicts actual results for the first month using the online supplier of titanium for Best Bikes. The details of the table are as follows:

1. Bicycles produced: 400

2. Titanium purchased: 5,200 pounds for 88,400 dollars

3. Titanium used in production: 4,700 pounds

    1. Required
    2. 1. Compute the direct materials price and efficiency variances.
    3. 2. What factors can explain the variances identified in requirement 1? Could any other variances be affected?
    4. 3. Was switching suppliers a good idea for Best Bikes? Explain why or why not.
    5. 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?
    6. 5. Other than performance evaluation, what reasons are there for calculating variances?
    7. 6. What future problems could result from Best Bikes’ decision to buy a lower quality of titanium from the online marketplace?
  1. 7-39. DIRECT MANUFACTURING LABOR AND DIRECT MATERIALS VARIANCES, MISSING DATA. (CMA, heavily adapted) Oyster Bay Surfboards manufactures fiberglass surfboards. The standard cost of direct materials and direct manufacturing labor is $248 per board. This includes 35 pounds of direct materials, at the budgeted price of $3 per pound, and 11 hours of direct manufacturing labor, at the budgeted rate of $13 per hour. Following are additional data for the month of July:
<p>A table shows data for the month of July for Oyster Bay Surfboards</p>

The table depicts data for the month of July for Oyster Bay Surfboards. The details of the table are as follows:

1. Units completed: 5,600 units

2. Direct material purchases: 230,000 pounds

3. Cost of direct material purchases: 759,000 dollars

4. Actual direct manufacturing labor-hours: 43,000 hours

5. Actual direct manufacturing labor cost: 623,500 dollars

6. Direct materials efficiency variance: 1,200 dollars F

  1.  There were no beginning inventories.
    1. Required
    2. 1. Compute direct manufacturing labor variances for July.
    3. 2. Compute the actual pounds of direct materials used in production in July.
    4. 3. Calculate the actual price per pound of direct materials purchased.
    5. 4. Calculate the direct materials price variance.
  2. 7-40. DIRECT MATERIALS EFFICIENCY, MIX, AND YIELD VARIANCES. Sandy’s Snacks produces snack mixes for the gourmet and natural foods market. Its most popular product is Tempting Trail Mix, a mixture of peanuts, dried cranberries, and chocolate pieces. For each batch, the budgeted quantities and budgeted prices are as follows:
Quantity per BatchPrice per Cup
Peanuts60 cups$1
Dried cranberries30 cups$2
Chocolate pieces10 cups$3
  1. Small changes to the standard mix of direct materials reflected in the above quantities do not significantly affect the overall end product. In addition, not all ingredients added to production end up in the finished product, as some are rejected during inspection.
<p>A table shows actual quantity, cost, and mix of inputs for Sandy’s Snacks.</p>

The table depicts actual quantity, actual cost, and actual mix for peanuts, dried cranberries, and chocolate pieces, as well as the actual total. The details of the table are as follows:

1. Peanuts

2. Dried cranberries

3. Chocolate pieces

4. Total actual

  1. In the current period, Sandy’s Snacks made 100 batches of Tempting Trail Mix with the following actual quantity, cost, and mix of inputs:
    1. Required
    2. 1. What is the budgeted cost of direct materials for the 100 batches?
    3. 2. Calculate the total direct materials efficiency variance.
    4. 3. Calculate the total direct materials mix and yield variances.
    5. 4. How do the variances calculated in requirement 3 relate to those calculated in requirement 2? What do the variances calculated in requirement 3 tell you about the 100 batches produced this period? Are the variances large enough to investigate?
  1. 7-41. DIRECT MATERIALS AND MANUFACTURING LABOR VARIANCES, SOLVING UNKNOWNS. (CPA, adapted) On May 1, 2020, Barron Company began the manufacture of a new paging machine known as Sleek. The company installed a standard costing system to account for manufacturing costs. The standard costs for a unit of Sleek follow:
<p>A table shows standard costs for a unit of Sleek</p>

The table depicts standard costs for a unit of Sleek. The details of the table are as follows:

1. Direct materials, 2 pounds at unknown dollar amount per pound: 10.00 dollars

2. Direct manufacturing labor, unknown number of hours at 15 dollars per hour: 12.00 dollars

3. Manufacturing overhead, unknown percent of direct manufacturing labor costs: 3.00 dollars

4. Standard cost per unit: unknown dollar amount

  1. The following data were obtained from Barron’s records for the month of May:
<p>A table shows data from Barron’s records for the month of May</p>

The table depicts data from Barron&rsquo;s records for the month of May. The details of the table are as follows:

1. Revenues: 180,000 dollars credit

2. Direct materials price variance: 1,048 dollars debit

3. Direct materials efficiency variance: 2,400 dollars debit

4. Direct manufacturing labor price variance: 1,925 dollars debit

5. Direct manufacturing labor efficiency variance: 2,250 dollars credit

  1. Actual production in May was 5,000 units of Sleek, and actual sales in May were 3,000 units.
  2. The amount shown for direct materials price variance applies to materials purchased and used during May. There was no beginning inventory of materials on May 1, 2020.
  3. Compute each of the following items for Barron Company for the month of May. Show your computations.
    1. Required
    2. 1. (a) Standard cost per pound of direct materials, (b) Standard hours per unit of direct manufacturing labor, (c) Standard manufacturing overhead cost expressed as a percentage of standard direct manufacturing labor cost, (d) Standard cost per unit (paging machine)
    3. 2. Standard direct manufacturing labor-hours allowed for actual output produced
    4. 3. Actual direct manufacturing labor-hours worked
    5. 4. Actual direct manufacturing labor wage rate
    6. 5. Standard quantity of direct materials allowed (in pounds)
    7. 6. Actual quantity of direct materials purchased and used (in pounds)
    8. 7. Actual direct materials price per pound
  4. 7-42. DIRECT MATERIALS AND MANUFACTURING LABOR VARIANCES, JOURNAL ENTRIES. Varsity Corn Hole is a small business that Manny Mercado developed while in college. He began building wooden corn hole game sets for friends, hand painted with college colors and logos. As demand grew, he hired some workers and began to manage the operation. Varsity Corn Hole maintains two departments: construction and painting. In the construction department, workers use wood to make the game sets. Varsity Corn Hole has some employees who have been with the company for a very long time and others who are new and inexperienced. Because of the nature of the wood, workers must work around flaws in the materials. Manny does not store inventory, and buys the wood as he receives an order.
  1. Actual and standard data for the construction department for September 2020 are shown below:
<p>A table shows actual data for the construction department for September 2020</p>

The table depicts actual data for the construction department for September 2020. The details of the table are as follows:

1. Game sets produced: 80

2. Direct materials used in production: 1,800 square feet of wood

3. Actual direct material cost: 7,020 dollars

4. Actual direct manufacturing labor-hours: 300

5. Actual direct manufacturing labor cost: 4,650 dollars

<p>A table shows standard data for the construction department for September 2020</p>

The table depicts standard data for the construction department for September 2020. The details of the table are as follows:

1. Purchase price of direct materials: 4 dollars per square foot of wood

2. Direct materials per game set: 20 square feet of wood

3. Wage rate in construction department: 15 dollars per hour

4. Construction department direct labor hours per game set: 4 hours

    1. Required
    2. 1. For the construction department, calculate the price and efficiency variances for the wood and the price and efficiency variances for direct manufacturing labor.
    3. 2. Record the journal entries for the variances incurred.
    4. 3. Discuss logical explanations for the combination of variances that the construction department of Varsity Corn Hole experienced.
  1. 7-43. USE OF MATERIALS AND MANUFACTURING LABOR VARIANCES FOR BENCHMARKING. You are a new junior accountant at Clearvision Corporation, maker of lenses for eyeglasses. Your company sells generic-quality lenses for a moderate price. Your boss, the controller, has given you the latest month’s report for the lens trade association. This report includes information related to operations for your firm and your closest competitor for September 2020. The report also includes information related to the industry benchmark for lens manufacturers for each line item in the report. You are Firm A and your closest competitor is Firm B.
<p>A table shows the latest month’s report for the lens trade association</p>

The table depicts materials input, materials price, labor-hours used per lens, wage rate, and variable overhead rate for Firm A, Firm B, and the industry benchmark. The details of the table are as follows:

1. Materials input

2. Materials price

3. Labor-hours used per lens

4. Wage rate

5. Variable overhead rate

    1. Required
    2. 1. Calculate the total variable cost per unit for each firm. Compute the percent of total for the material, labor, and variable overhead components.
    3. 2. Using Firm B as a benchmark, calculate direct materials and direct manufacturing labor price and efficiency variances for Firm A for one lens.
    4. 3. Write a brief memo to your boss outlining the advantages and disadvantages of belonging to this trade association for benchmarking purposes. Include a few ideas to improve productivity that you want your boss to take to the department heads’ meeting.
  1. 7-44. DIRECT MANUFACTURING LABOR VARIANCES: PRICE, EFFICIENCY, MIX, AND YIELD. Elena Martinez employs two workers in her wedding cake bakery. The first worker, Gabrielle, has been making wedding cakes for 20 years and is paid $25 per hour. The second worker, Joseph, is less experienced and is paid $15 per hour. One wedding cake requires, on average, 6 hours of labor. The budgeted direct manufacturing labor quantities for one cake are as follows:
<p>A table shows the budgeted direct manufacturing labor quantities for one cake</p>

The table depicts the budgeted direct manufacturing labor quantities for one cake. The details of the table are as follows:

1. Gabrielle: 3 hours

2. Joseph: 3 hours

3. Total: 6 hours

  1. That is, each cake is budgeted to require 6 hours of direct manufacturing labor, composed of 50% of Gabrielle’s labor and 50% of Joseph’s, although sometimes Gabrielle works more hours on a particular cake and Joseph less, or vice versa, with no obvious change in the quality of the cake.
  2. During the month of May, the bakery produces 50 cakes. Actual direct manufacturing labor costs are as follows:
<p>A table shows the actual direct manufacturing labor costs for the month of May</p>

The table depicts the actual direct manufacturing labor costs for the month of May. The details of the table are as follows:

1. Gabrielle, 140 hours: 3,500 dollars

2. Joseph, 165 hours: 2,475 dollars

3. Total actual direct labor cost: 5,975 dollars

    1. Required
    2. 1. What is the budgeted cost of direct manufacturing labor for 50 cakes?
    3. 2. Calculate the total direct manufacturing labor price and efficiency variances.
    4. 3. For the 50 cakes, what is the total actual amount of direct manufacturing labor used? What is the actual direct manufacturing labor input mix percentage? What is the budgeted amount of Gabrielle’s and Joseph’s labor that should have been used for the 50 cakes?
    5. 4. Calculate the total direct manufacturing labor mix and yield variances. How do these numbers relate to the total direct manufacturing labor efficiency variance? What do these variances tell you?
  2. 7-45 DIRECT MATERIALS AND DIRECT MANUFACTURING LABOR VARIANCES WITH MISSING DATA. The Shirt Company produces cotton/polyester blend T-shirts to supply a custom T-shirt customer. The company experienced a computer failure and some of the data were lost and could not be recovered. The data the company were able to recover are shown below:
  1. 7-45. [Required] DIRECT MATERIALS AND DIRECT MANUFACTURING LABOR VARIANCES WITH MISSING DATA. The Shirt Company produces cotton/polyester blend T-shirts to supply a custom T-shirt customer. The company experienced a computer failure and some of the data were lost and could not be recovered. The data the company were able to recover are shown below:
<p>A table shows recovered data for The Shirt Company</p>

The table depicts recovered data for The Shirt Company. The details of the table are as follows:

1. Direct materials used: 800,000 square yards

2. Direct materials purchased: 820,000 square yards

3. Direct materials price variance: 24,600 dollars F

4. Direct materials efficiency variance: 16,000 dollars U

5. Direct manufacturing labor price variance: 26,500 dollars U

6. Direct manufacturing labor efficiency variance: 30,000 dollars U

7. Standard price of direct materials: 2 dollars per square yard

8. Standard quantity of direct materials per T-shirt: 1.2 square yards

9. Actual direct manufacturing labor cost: 7,976,500 dollars

10. Actual direct manufacturing labor rate: 15.05 dollars per hour

  1. Calculate the following:
    1. Required
    2. 1. Actual price per square yard of direct materials
    3. 2. Actual quantity of shirts produced
    4. 3. Actual direct manufacturing labor hours worked
    5. 4. Standard direct manufacturing labor rate
    6. 5. Standard direct manufacturing labor hours per shirt
  2. 7-46. MIX AND YIELD VARIANCES IN THE SERVICE SECTOR. Cathy Jeffries operates Relaxing Day, a day spa with 15 employees. Jim Ryan has recently been hired by Jeffries as a controller. Relaxing Day’s previous accountant had done very little in the area of variance analysis, but Ryan believes that the company could benefit from a greater understanding of its business processes. Because of the labor-intensive nature of the business, he decides to focus on calculating labor variances.
  3. Ryan examines past accounting records, and establishes some standards for the price and quantity of labor. While Relaxing Day’s employees earn a range of hourly wages, they fall into two general categories: skilled labor, with an average wage of $30 per hour, and unskilled labor, with an average wage of $12 per hour. The average spa treatment requires 5 hours and typically requires a combination of 4 skilled hours and 1 unskilled hour.
  4. Actual data from last month, when 800 spa treatments were completed, are as follows:
<p>A table shows actual data from completing 800 spa treatments last month</p>

The table depicts actual data from completing 800 spa treatments last month. The details of the table are as follows:

1. Skilled, 3,318 hours: 99,540 dollars

2. Unskilled, 632 hours: 6,952 dollars

3. Total actual direct labor cost: 106,492 dollars

  1. Looking over last month’s data, Ryan determines that Relaxing Day’s labor price variance was $632 favorable, but the labor efficiency variance was $1,524 unfavorable. When Ryan presents his findings to Jeffries, the latter is furious. “Do you mean to tell me that my employees wasted $1,524 worth of time last month? At closer look, the skilled labor wasted more time than the unskilled labor who are paid less. I’ve had enough. They had better shape up, or else!” Ryan tries to calm her down, saying that in this case the efficiency variance does not necessarily mean that employees were wasting time. Ryan tells her that he is going to perform a more detailed analysis, and will get back to her with more information soon.
    1. Required
    2. 1. What is the budgeted cost of direct labor for 800 spa treatments?
    3. 2. How were the $632 favorable price variance and the $1,524 unfavorable labor efficiency variance calculated? What was the company’s flexible-budget variance?
    4. 3. What do you think Ryan meant when he said that “in this case the efficiency variance does not necessarily mean that employees were wasting time”?
    5. 4. For the 800 spa treatments performed last month, what is the actual direct labor input mix percentage? What was the standard mix for direct labor?
    6. 5. Calculate the total direct labor mix and yield variances.
    7. 6. How could these variances be interpreted? Did the employees waste time? Upon further investigation, Ryan discovers 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?
  1. 7-47. PRICE AND EFFICIENCY VARIANCES, BENCHMARKING AND ETHICS. Sunto Scientific manufactures GPS devices for a chain of retail stores. Its most popular model, the Magellan XS, is assembled 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 production costs of the Magellan XS. It has also implemented a just-in-time system so the Savannah facility operates with no inventory of any kind.
  2. 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 developed from specialty plastic. The budgeted and actual amounts for Magellan XS for July 2020 were as follows:
Budgeted AmountsActual Amounts
Magellan XS units produced    4,000    4,400
Navigation systems cost$81,600$89,000
Navigation systems used    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
  1. 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 consultant 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 lenient benchmarks make his performance look good.
    1. Required
    2. 1. Compute the price and efficiency variances for the three categories of direct materials and for direct manufacturing labor in July 2020.
    3. 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?
    4. 3. If Williams does nothing about the standard costs, will his behavior violate any of the standards of ethical conduct for practitioners described in the IMA Statement of Ethical Professional Practice (see Exhibit 1-7)?
    5. 4. What actions should Williams take?
    6. 5. Williams can obtain benchmarking information about the estimated costs of Sunto’s competitors 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.