Exercise 10-6 (20 minutes)

1.

Standard Quantity
Allowed
for Actual Output,
at Standard Price
(SQ SP)
18,000 ounces*
$2.50 per ounce
= $45,000

Actual Quantity of
Input,
at Standard Price
(AQ SP)
20,000 ounces
$2.50 per ounce
= $50,000

Actual Quantity of
Input,
at Actual Price
(AQ AP)
20,000 ounces
$2.40 per ounce
= $48,000

Materials quantity
variance = $5,000 U

Materials price
variance = $2,000
F
Spending variance = $3,000 U

*2,500 units 7.2 ounces per unit = 18,000 ounces

Alternatively, the variances can be computed using the
formulas:
Materials quantity variance = SP (AQ SQ)
= $2.50 per ounce (20,000 ounces 18,000 ounces)
= $5,000 U
Materials price variance = AQ (AP SP)
= 20,000 ounces ($2.40 per ounce $2.50 per ounce)
= $2,000 F

Exercise 10-6 (continued)

2.

Standard Hours
Allowed
for Actual Output,
at Standard Rate
(SH SR)
1,000 hours*
$10.00 per hour
= $10,000

Actual Hours of
Input,
at Standard Rate
(AH SR)
900 hours
$10.00 per hour
= $9,000

Actual Hours of
Input,
at Actual Rate
(AH AR)
$10,800

Labor efficiency
Labor rate variance
variance
= $1,000 F
= $1,800 U
Spending variance = $800 U
*2,500 units 0.4 hour per unit = 1,000 hours
Alternatively, the variances can be computed using the
formulas:
Labor efficiency variance = SR (AH SH)
= $10 per hour (900 hours 1,000 hours)
= 1,000 F
Labor rate variance = AH (AR SR)
= 900 hours ($12 per hour* $10 per hour)
= $1,800 U
*10,800 900 hours = $12 per hour

Exercise 10-7 (15 minutes)

Notice in the solution below that the materials price variance is
computed on the entire amount of materials purchased, whereas
the materials quantity variance is computed only on the amount
of materials used in production.
Standard Quantity
Allowed for Actual
Output,
at Standard Price
(SQ SP)
14,400 ounces*
$2.50 per ounce
= $36,000

Actual Quantity
of Input,
at Standard Price
(AQ SP)

Actual Quantity
of Input,
at Actual Price
(AQ AP)

16,000 ounces
$2.50 per ounce
= $40,000

20,000 ounces
$2.40 per ounce
= $48,000

Materials quantity
variance = $4,000 U
20,000 ounces
$2.50 per ounce
= $50,000
Materials price
variance
= $2,000 F
*2,000 bottles 7.2 ounces per bottle = 14,400 ounces
Alternatively, the variances can be computed using the
formulas:
Materials quantity variance = SP (AQ SQ)
= $2.50 per ounce (16,000 ounces 14,400 ounces)
= $4,000 U
Materials price variance = AQ (AP SP)
= 20,000 ounces ($2.40 per ounce $2.50 per ounce)
= $2,000 F

Exercise 10-8 (30 minutes)

1.
a.
Notice in the solution below that the materials price variance is
computed on the entire amount of materials purchased, whereas the
materials quantity variance is computed only on the amount of materials
used in production.

Standard Quantity
Allowed for Actual
Output,
at Standard Price
(SQ SP)
40,000 diodes*
$0.30 per diode
= $12,000

Actual Quantity
of Input,
at Standard Price
(AQ SP)

Actual Quantity
of Input,
at Actual Price
(AQ AP)

50,000 diodes
$0.30 per diode
= $15,000

70,000 diodes
$0.28 per diode
= $19,600

Materials quantity
variance = $3,000 U
70,000 diodes
$0.30 per diode
= $21,000
Materials price
variance
= $1,400 F
*5,000 toys 8 diodes per toy = 40,000 diodes
Alternatively, the variances can be computed using the
formulas:
Materials quantity variance = SP (AQ SQ)
= $0.30 per diode (50,000 diodes 40,000 diodes)
= $3,000 U
Materials price variance = AQ (AP SP)
= 70,000 diodes ($0.28 per diode $0.30 per diode)
= $1,400 F

Exercise 10-8 (continued)

b.

Direct labor variances:

Standard Hours
Allowed
for Actual Output,
at Standard Rate
(SH SR)
3,000 hours*
$14.00 per hour
= $42,000

Actual Hours of
Input,
at Standard Rate
(AH SR)
3,200 hours
$14.00 per hour
= $44,800

Actual Hours of
Input,
at Actual Rate
(AH AR)
$48,000

Labor efficiency
Labor rate variance
variance
= $2,800 U
= $3,200 U
Spending variance = $6,000 U
*5,000 toys 0.6 hours per toy = 3,000 hours
Alternatively, the variances can be computed using the
formulas:
Labor efficiency variance = SR (AH SH)
= $14.00 per hour (3,200 hours 3,000 hours)
= $2,800 U
Labor rate variance = AH (AR SR)
= 3,200 hours ($15.00* per hour $14.00 per hour)
= $3,200 U
*$48,000 3,200 hours = $15.00 per hour

Exercise 10-8 (continued)

2. A variance usually has many possible explanations. In
particular, we should always keep in mind that the standards
themselves may be incorrect. Some of the other possible
explanations for the variances observed at Topper Toys appear
below:
Materials Price VarianceSince this variance is favorable, the
actual price paid per unit for the material was less than the
standard price. This could occur for a variety of reasons including
the purchase of a lower grade material at a discount, buying in
an unusually large quantity to take advantage of quantity
discounts, a change in the market price of the material, and
particularly sharp bargaining by the purchasing department.
Materials Quantity VarianceSince this variance is unfavorable,
more materials were used to produce the actual output than
were called for by the standard. This could also occur for a
variety of reasons. Some of the possibilities include poorly
trained or supervised workers, improperly adjusted machines,
and defective materials.
Labor Rate VarianceSince this variance is unfavorable, the
actual average wage rate was higher than the standard wage
rate. Some of the possible explanations include an increase in
wages that has not been reflected in the standards,
unanticipated overtime, and a shift toward more highly paid
workers.
Labor Efficiency VarianceSince this variance is unfavorable,
the actual number of labor hours was greater than the standard
labor hours allowed for the actual output. As with the other
variances, this variance could have been caused by any of a
number of factors. Some of the possible explanations include
poor supervision, poorly trained workers, low-quality materials
requiring more labor time to process, and machine breakdowns.
In addition, if the direct labor force is essentially fixed, an
unfavorable labor efficiency variance could be caused by a
reduction in output due to decreased demand for the companys
products.

Exercise 11-6 (15 minutes)

1.

Margin =
=
Turnover =
=

Net operating income

Sales
$800,000
= 10%
$8,000,000
Sales
Average operating assets
$8,000,000
= 2.5
$3,200,000

ROI = Margin Turnover

= 10% 2.5 = 25%

2.

Margin =

Net operating income

Sales

$800,000(1.00 + 4.00)
$8,000,000(1.00 + 1.50)

$4,000,000
= 20%
$20,000,000

Turnover =

Sales
Average operating assets

$8,000,000 (1.00 + 1.50)

$3,200,000

$20,000,000
= 6.25
$3,200,000

ROI = Margin Turnover

= 20% 6.25 = 125%

Exercise 11-6 (continued)

3.

Margin =

Net operating income

Sales

$800,000 + $250,000
$8,000,000 + $2,000,000

$1,050,000
= 10.5%
$10,000,000

Turnover =

Sales
Average operating assets

$8,000,000 + $2,000,000
$3,200,000 + $800,000

$10,000,000
= 2.5
$4,000,000

ROI = Margin Turnover

= 10.5% 2.5 = 26.25%

Exercise 11-7 (20 minutes)

1. ROI computations:

ROI =

Net operating income

Sales

Sales
Average operating assets

Perth:

Darwin:
2.

$630,000
$9,000,000

= 7% 3 = 21%
$9,000,000
$3,000,000
$1,800,000
$20,000,000

= 9% 2 = 18%
$20,000,000
$10,000,000

Perth

Darwin
$10,000,00
Average operating assets.............. $3,000,000
0
Net operating income................... $630,000 $1,800,000
Minimum required return on
average operating assets16%
Average operating assets........
480,000 1,600,000
Residual income............................ $150,000 $ 200,000

3. No, the Darwin Division is simply larger than the Perth Division
and for this reason one would expect that it would have a
greater amount of residual income. Residual income cant be
used to compare the performance of divisions of different sizes.
Larger divisions will almost always look better. In fact, in the
case above, Darwin does not appear to be as well managed as
Perth. Note from Part (1) that Darwin has only an 18% ROI as
compared to 21% for Perth.

Exercise 11-8 (15 minutes)

Sales.....................................
Net operating income............
Average operating assets......
Return on investment (ROI)...
Minimum required rate of
return:
Percentage..........................
Dollar amount.....................
Residual income....................
*Given.

Company Company
A
B
$400,00
$750,00
0 *
0*
$32,000
$45,000 *
$160,00
$250,00
0 *
0
20% *
18% *

Company
C
$600,00
0*
$24,000
$150,00
0*
16%

15% *
20%
$24,000
$50,000 *
$8,000
$(5,000)

12% *
$18,000
$6,000 *

Exercise 11-9 (30 minutes)

1. Computation of ROI.

ROI =

$300,000
$6,000,000

= 5% 4 = 20%
$6,000,000
$1,500,000

ROI =

$900,000
$10,000,000

= 9% 2 = 18%
$10,000,000
$5,000,000

ROI =

$180,000
$8,000,000

= 2.25% 4 = 9%
$8,000,000
$2,000,000

Division A:

Division B:

Division C:
2.

Division A

Division B

Division C
Average operating
$2,000,00
assets........................... $1,500,000 $5,000,000
0
Required rate of return....
15%
18%
12%
Minimum required
return........................... $ 225,000 $ 900,000 $ 240,000
Actual net operating
income......................... $ 300,000 $ 900,000 $ 180,000
Minimum required
return (above)..............
225,000
900,000
240,000
Residual income.............. $ 75,000 $
0 $ (60,000)

Exercise 12-1 (15 minutes)

a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.

Case 1
Not
Releva Releva
Item
nt
nt
Sales revenue.............
X
Direct materials..........
X
Direct labor.................
X
Variable
manufacturing
overhead..................
X
Book valueModel
A3000 machine........
X
Disposal value
Model A3000
machine...................
X
DepreciationModel
A3000 machine........
X
Market valueModel
B3800 machine
(cost)........................
X
Fixed manufacturing
overhead..................
X
Variable selling
expense...................
X
Fixed selling expense..
X
General
administrative
overhead..................
X

Case 2
Not
Relevan Relevan
t
t
X
X
X
X
X
X
X
X
X
X
X
X

Exercise 12-3 (30 minutes)

1.

Per Unit
Differential
Costs
Mak
e
Buy
Cost of purchasing..................
Direct materials......................
Direct labor.............................
Variable manufacturing
overhead..............................
Fixed manufacturing
overhead, traceable1............
Fixed manufacturing
overhead, common...............

$20
$6
8
1

15,000

30,000
0

Total costs............................... $17

$20

Make
$
90,000
120,000

Difference in favor of
continuing to make the
parts.....................................

15,000 units
Buy
$300,00
0

0
0
$255,00 $300,00
0
0

$3

$45,000

Only the supervisory salaries can be avoided if the parts are

purchased. The remaining book value of the special
equipment is a sunk cost; hence, the $3 per unit
depreciation expense is not relevant to this decision.

Based on these data, the company should reject the offer and
should continue to produce the parts internally.
2.

Make

Buy
$300,00
0

Cost of purchasing (part 1)...................

Cost of making (part 1)......................... $255,000
Opportunity costsegment margin
forgone on a potential new product
line.....................................................
65,000
Total cost............................................... $320,000 $300,00

0
Difference in favor of purchasing from
the outside supplier............................

$20,000

Thus, the company should accept the offer and purchase the
parts from the outside supplier.
Exercise 12-6 (20 minutes)
1. The value of relaxing the constraint can be determined by
computing the contribution margin per unit of the constrained
resource:

Selling price per unit............................................

Variable cost per unit...........................................
Contribution margin per unit (a)..........................
Upholstery shop time required to produce one
unit (b)..............................................................
Contribution margin per unit of the constrained
resource (a) (b)..............................................

Leather
Library
Chair
$1,800
1,200
$ 600
12 hours
$50 per
hour

The company should be willing to pay up to $50 per hour to

keep the upholstery shop open after normal working hours.
2. To answer this question, it is desirable to compute the
contribution margin per unit of the constrained resource for all
three products:

Selling price per unit.............

Variable cost per unit............
Contribution margin per unit
(a)......................................
Upholstery shop time
required to produce one
unit (b)...............................
Contribution margin per unit
of the constrained resource
(a) (b).............................

Gainsborough
Armchai
r
$1,300
800
$ 500

Leathe
r
Library
Chair
$1,800
1,200
$ 600

Chippe
n-dale
Fabric
Armcha
ir
$1,400
1,000
$ 400

8 hours

12
hours

5 hours

$62.50
per hour

$50.00
per
hour

$80.00
per hour

The offer to upholster chairs for $45 per hour should be

accepted. The time would be used to upholster Chippendale
Fabric Armchairs. If this increases the total production and
sales of those chairs, the time would be worth $80 per houra
net gain of $35 per hour. If Chippendale Fabric Armchairs are
already being produced up to demand, then having

these chairs upholstered in the other company would free up

capacity to produce more of the other two chairs. In both cases,
the additional time is worth more than $45 per hour.

Exercise 12-7 (10 minutes)

Sales value after further

processing................................
Sales value at split-off point........
Incremental revenue...................
Cost of further processing...........
Incremental profit (loss)..............

Product
X

Product
Y

$80,000 $150,000
50,000
90,000
30,000
60,000
35,000
40,000
$(5,000)
20,000

Product
Z
$75,000
60,000
15,000
12,000
3,000

Products Y and Z should be processed further, but not Product

X.

Exercise 12-8 (10 minutes)

Merifulon should be processed further:
Sales value after further processing......... $60,000
Sales value at the split-off point............... 40,000
Incremental revenue from further
processing.............................................. 20,000
Cost of further processing......................... 13,000
Profit from further processing................... $7,000
The $10,000 in allocated common costs (1/3 $30,000) will be
the same regardless of which alternative is selected, and hence is
not relevant to the decision.

Exercise 12-9 (15 minutes)

The company should accept orders first for Product Z, second for
Product X, and third for Product Y. The computations are:

(a) Direct materials required per

unit..........................................
(b) Cost per pound..........................
(c) Pounds required per unit (a)
(b)...........................................
(d) Contribution margin per unit......
Contribution margin per pound
of materials used (d) (c)......

Product Product Product

X
Y
Z
$24.00 $15.00
$3.00
$3.00

$9.00
$3.00

8
5
$32.00 $14.00

3
$21.00

$4.00

$2.80

$7.00

Because Product Z uses the least amount of material per unit of

the three products, and because it is the most profitable of the
three in terms of its use of this constrained resource, some
students will immediately assume that this is an infallible
relationship. That is, they will assume that the way to spot the
most profitable product is to find the one using the least amount
of the constrained resource. The way to dispel this notion is to
point out that Product X uses

more material (the constrained

resource) than does Product Y, but yet it is preferred over Product
Y. The key factor is not how much of a constrained resource a
product uses, but rather how much contribution margin the
product generates per unit of the constrained resource.

Exercise 12-10 (30 minutes)

No, the overnight cases should not be discontinued. The
computations are:
Contribution margin lost if the cases are
discontinued...........................................
Less fixed costs that can be avoided if
the cases are discontinued:

$
Salary of the product line manager...... 21,000
Advertising........................................... 110,000
Insurance on inventories......................
9,000

Net disadvantage of dropping the cases...

$(260,000
)

140,000
$(120,000
)

The same solution can be obtained by preparing comparative

income statements:
Difference:
Net
Operating
Keep
Drop
Income
Overnig Overnigh Increase or
ht Cases t Cases
(Decrease)
Sales........................................ $450,000 $
0 $(450,000)
Variable expenses:
Variable manufacturing
expenses............................. 130,000
0
130,000
Sales commissions................. 48,000
0
48,000
Shipping................................. 12,000
0
12,000
Total variable expenses............ 190,000
0
190,000
Contribution margin................. 260,000
0
(260,000)
Fixed expenses:
Salary of line manager........... 21,000
0
21,000
General factory overhead...... 104,000 104,000
0
Depreciation of equipment. . . . 36,000
36,000
0
Advertisingtraceable........... 110,000
0
110,000
Insurance on inventories........
9,000
0
9,000
Purchasing department.......... 50,000
50,000
0
Total fixed expenses................. 330,000 190,000
140,000

$ (70,000 $(190,000
Net operating loss....................
)
)

$(120,000)