Additional Topics in Variance Analysis: Solutions To Review Questions

17
Additional Topics in Variance Analysis
Solutions to Review Questions
17-1.
When production is not equal to sales, a portion of the sales comes from inventory or a
portion of production goes into inventory. In this case, the production costs expensed will
(generally) not be the same as the production costs incurred. In addition, a decision needs
to be made about whether to expense the entire variance or to prorate it between Cost of
Goods Sold and Finished Goods Inventory.
17-2.
False. Variances simply represent differences between plans and actual outcomes.
Capturing these variances can provide useful information regardless of whether
inventories exist. Knowledge about differences between plans and actual outcomes can
help managers improve planning or take steps to improve operations.
17-3.
Variances are usually “expensed” as a period cost (e.g., charged to Cost of Goods Sold).
Variances can also be prorated to accounts according to the standard cost balances in
each of the accounts. Hence, a materials price variance recorded at the time of purchase
would be prorated to Materials Inventory, Materials Efficiency Variance (because this
variance is initially recorded at standard cost), Work in Process, Finished Goods, and Cost
of Goods Sold according to the current year standard cost balances in those accounts.
17-4.
The industry volume variance measures the impact of differences between actual and
expected industry sales volume on the company’s sales activity variance. Use of industry-
wide data helps explain changes in volume in terms of what is happening to the industry.
17-5.
Efficiencies can be realized for costs only. The sales activity variance captures the effect
on profit resulting from the difference between actual and budgeted sales.
17-6.
Some possible decisions for which the market share variance would be useful include
marketing (advertising) decisions, investment decisions, and product line portfolio
decisions.
©The McGraw-Hill Companies, Inc., 2017

Solutions Manual, Chapter 17 793
17-7.
False. If a company has two or more products, a mix variance can arise even if the net
effect of all variances is zero. It might be very useful to learn about the mix variance
because if the mix is changing, the company might need to change production and/or
marketing strategies to meet the change in mix. The U.S. automobile industry was facing
rising revenues and rising volumes but, unfortunately, there were falling profits because
buyers were purchasing smaller cars that had lower profit margins for the manufacturers.
17-8.
Examples include:
 Steel mills which can process both new steel and recycled scrap
 Oil refineries which can process different grades of crude oil
 Distilleries producing blended whiskeys
 Chemical companies
17-9.
The concept of management by exception suggests managers not focus on things that are
proceeding according to plan. This allows time to focus on deviations (variances) from
expectations.

794
794 Fundamentals of Cost Accounting
Solutions to Critical Analysis and Discussion Questions
17-10.
By recognizing the materials price variance at the time of purchase, management
captures any difference between actual materials cost and the standard costs as reflected
in the budget as those costs are incurred. If the price variance is not reflected until the
time of use, the effect of price changes might not be recognized until the materials are
removed from the raw materials inventory and placed into work in process. This could be
a substantial time delay. If decisions need to be made to compensate for the effect of
materials price changes, it would seem that the sooner the information comes to
management's attention, the better the opportunities to react to the information.
17-11.
As with all firms, sports teams budget for revenues from different sources, in this case
ticket sales and concessions. Depending on the event, a different customer mix might lead
to a difference in the proportion of revenues from these two sources.
17-12.
In this situation the company is really selling just one product so a mix variance would not
be meaningful.
17-13.
In a hospital, as in other professional firms, billing rates vary with the level of the
professional person performing services. Hence, a physician’s time is billed at a higher
rate than an intern’s time. Even though the volume of hours billed might be the same, if
the mix of physician to intern time is different there will be differences in revenues (and,
most likely in profits as well).
17-14.
Salary rates vary according to the classification of the service providers (e.g., nurses’ pay
is higher than nurse practitioners’ pay), and the hospital will budget a certain amount of
time for each classification. Thus, a labor mix variance can be calculated to show if the
appropriate personnel were used in a particular period or in a particular unit (e.g.,
intensive care). An unfavorable mix variance would suggest that nurses were doing work
that nurse practitioners should have done.
17-15.
Disagree. The purpose of variance analysis is to identify items that are different from what
we expected (budgeted). Therefore, we should be as interested in favorable variances as
in unfavorable variances. Even if there is not a problem (for example, managers hiding
expenses), we would still like to know where things are working well so that we can
implement them in other areas of the organization.

17-16.
Answers will vary. Variance analysis is helpful in any setting where budgets are
calculated, including business schools (and other academic institutions). In addition to the
usual price and volume variances, a sales mix variance will often be helpful, because
there are different levels of tuition (and costs) for different degree programs at many
schools. Another variance that might be important is a production mix variance if the mix
of faculty delivering programs differs significantly from what was budgeted.
17-17.
Answers will vary. A company such as Uber with several services (Uber-X, Uber-Black,
and so on), would likely learn something from sales activity and mix. Whether they would
benefit from the other variances depends on well the industry or market is defined and the
extent to which they can substitute inputs. One of the challenges of variance analysis is
taking the general concepts discussed in the book and in class and applying them to a
business where the data are not always easily available.

796
Solutions to Exercises
17-18. (15 min.) Variable Cost Variances: Materials Purchased And Used Are Not
Equal: Gates Corporation.
Flexible
Actual Budget
Inputs at (Standard
Actual Price Standard Efficiency Allowed for
Costs Variance Price Variance Good Output)
Purchase $673,000 $688,000
Computations
$15,000 F
$20 x 22,000
$444,000 = $440,000
Usage
Computations $4,000 U
17-19. (15. Min) Variable Cost Variances: Materials Purchased And Used Are Not
Equal: Mathis, Inc.
Flexible
Actual Budget
Inputs at (Standard
Actual Price Standard Efficiency Allowed for
Costs Variance Price Variance Good Output)
Purchase $1,642,800 $1,554,000
Computations
$88,800 U
$14 x 103,000
$1,405,950 = $1,442,000
Usage
Computations $36,050 F

17-20. (15 min.) Industry Volume And Market Share Variances: D&B Ice Cream.
Flexible Budget Market Standard Contribution Industry Master Budget

Share Margin Times Volume
(SCM x AQ) (SCM x SQ)
Variance Budgeted Market Variance
Share Times Actual
Industry Volume
(SCM x ASQ)
$6 x 126,000 $6 x 16% x 900,000 $6 x 16% x 850,000
= $756,000 = $864,000 = $816,000
$108,000 U $48,000 F
$60,000 U
17-21. (20 min.) Industry Volume And Market Share Variances—Missing Data.
a. 15,000 fewer units = 52,500 fewer units – 37,500 more units.

b. 900,000 units. [1,050,000 – (b)] x 25% = 37,500 units.
c. 25% (from industry volume line).
d. 20%. [(d) – 25%] x 1,050,000 = 52,500 fewer units.
e. 1,050,000 units (from industry volume line).
17-22. (20 min.) Industry Volume And Market Share—Missing Data.
a. 20,000 fewer units = 100,000 more units activity variance – 120,000 more units market
share variance.
b. 3,000,000 units (from market share line).
c. 8% (from market share line).
d. 3,250,000. [3,000,000 – d] x 8% = 20,000 fewer units.
e. 12%. (e – 8%) x 3,000,000 = 120,000 more units.

798
17-23. (20 min.) Sales Mix And Quantity Variances: A-Zone Media.
a. and b.
The actual prices are not relevant here. The mix and quantity variances are based on
standard (budgeted) contribution margin per unit.
Flexible Budget Mix Quantity
AQ x (SP – SV) Variance ASQ x (SP – SV) Variance Master Budget
7,500 x ($192 - $80) 11,500 x (10,000/12,500) x ($192 - $80) 10,000 x ($192 - $80)
+ 4,000 x ($416 - $160) + 11,500 x (2,500/12,500) x ($416 - $160) + 2,500 x ($416 - $160)
= $1,864,000 = $1,619,200 = $1,760,000
$244,800 F $140,800 U
$104,000 F
Activity Variance
17-24. (20 min.) Sales Mix And Quantity Variances: Sara’s Systems.
a. and b.

26,400 x ($200 - $80) 33,600 x (22,500/30,000) x ($200 - $80) 22,500 x ($200 - $80)
+ 7,200 x ($480 - $160) + 33,600 x (7,500/30,000) x ($480 - $160) + 7,500 x ($480 - $160)
= $5,472,000 = $5,712,000 = $5,100,000
$240,000 U $612,000 F
$372,000 F
Activity Variance

17-25. (20 min.) Sales Mix And Quantity Variances: Hotel Galaxy.
a. and b.

1,350 x ($35 - $15) 2,300 x (1,000/2,500) x ($35 - $15) 1,000 x ($35 - $15)
+ 950 x ($24 - $10) + 2,300 x (1,500/2,500) x ($24 - $10) + 1,500 x ($24 - $10)
= $40,300 = $37,720 = $41,000
$2,580 F $3,280 U
$700 U
Activity Variance
17-26. (20 min.) Sales Mix And Quantity Variances: Chow-4-Hounds.
a. and b.

60,000 x ($12 - $5) 210,000 x (60,000/200,000) x ($12 - $5) 60,000 x ($12 - $5)
+ 150,000 x ($9 - $4) + 210,000 x (140,000/200,000) x ($9 - $4) + 140,000 x ($9 - $4)
= $1,170,000 = $1,176,000 = $1,120,000
$6,000 U $56,000 F
$50,000 U
Activity Variance

800
17-27. (35 min.) Materials Mix and Yield Variances: Stacy, Inc.
a. and b.
Efficiency Variance
Flexible
Purchase Production
Actual Price Mix Yield Budget (SP
(AP x AQ) Variance (SP x AQ) Variance (SP x ASQ) Variance x SQ)
Material:
Alpha $4.50 x $5.00 x $5 x (1/3 x 240,000) = $5 x (40 x 2,000) =
88,000 = 88,000 = $5.00 x 80,000 $5 x 80,000 =
$396,000 $440,000 = $400,000 $400,000
$44,000 F $40,000 U $-0-
Efficiency Variance = $40,000 U
Beta $8.00 x $7.50 x $7.50 x (2/3 x 240,000) $7.50 x (80 x 2,000)

152,000 = 152,000 = = $7.50 x 160,000 = $7.50 x 160,000
$1,216,000 $1,140,000 = $1,200,000 = $1,200,000
$76,000 U $60,000 F $-0-
Efficiency Variance = $20,000 F
Total $1,612,000 $1,580,000 $1,600,000 = $1,600,000

$32,000 U $20,000 F $-0-
Production of 2,000 units should require 240,000 units of input (= 2,000 x 40 + 2,000 x
80). Actual usage was 240,000 units (= 88,000 + 152,000), so there was no yield
variance.

17-28. (35 min.) Materials Mix and Yield Variances: John’s Weed-B-Gone.
a. and b.
The actual purchase prices were $9.80 (= $35,280 ÷ 3,600) for Weed-X and $24.00 (=
$72,000 ÷ 3,000) for Pest-O.
Efficiency Variance
Flexible
Purchase Production
Actual Price Mix Yield Budget
(AP x AQ) Variance (SP x AQ) Variance (SP x ASQ) Variance (SP x SQ)
Material:
Weed-X $10 x (0.005 a
$9.80 x $10 x (1/2 x 6,600) x 648,000)
3,600 $10 x 3,600 = $10 x 3,300 = $10 x 3,240
= $35,280 = $36,000 = $33,000 = $32,400
$720 F $3,000 U $600 U
Efficiency Variance = $3,600 U
Pest-O $25 x (0.005 a

$25 x (1/2 x 6,600) x 648,000)
$24 x 3,000 $25 x 3,000 = $25 x 3,300 = $25 x 3,240
= $72,000 = $75,000 = $82,500 = $81,000
$3,000 F $7,500 F $1,500 U
Total $107,280 $111,000 $115,500 = $113,400

$3,720 F $4,500 F $2,100 U
a
(1 gallon ÷ 100 square yards) ÷ 2 = 0.005

802
17-29. (35 min.) Labor Mix and Yield Variance: Matt’s Eat ‘N Run.
a. and b.
Efficiency Variance
Flexible
Actual Purchase Production
(AP x Price Mix (SP x Yield Budget
AQ) Variance (SP x AQ) Variance ASQ) Variance (SP x SQ)
Labor:
Skilled $20 x (0.25 x 21,000) $20 x (2/60 x 180,000)
$20 x 6,000 = $20 x 5,250 = $20 x 6,000
$125,000 = $120,000 = $105,000 = $120,000
$5,000 U $15,000 U $15,000 F
Efficiency Variance = $-0-
Unskilled $10 x $10 x (0.75 x 21,000) $10 x (6/60 x 180,000)

15,000 = = $10 x 15,750 = $10 x 18,000 =
$240,000 $150,000 = $157,500 $180,000
$90,000 U $7,500 F $22,500 F
Total $365,000 $270,000 $262,500 = $300,000

$95,000 U $7,500 U $37,500 F

17-30. (10 min.) Flexible Budgeting—Service Organization: K&B.
Flexible Budget
(based on
actual of
7,200 hours)
Revenue ............................... $648,000a

Costs:
Professional salaries .......... 320,000b
Other variable costs ............ 96,000c
Fixed costs ......................... 200,000d
Total costs ........................ $616,000
Profit ..................................... $32,000
a 7,200 hrs.
$648,000 = x $810,000
9,000 hrs.
b 7,200 hrs.
$320,000 = x $400,000
9,000 hrs.
c 7,200 hrs.
$96,000 = x $120,000
9,000 hrs.
d $200,000 = Master budget fixed costs

804
17-31. (20 min.) Sales Activity Variance—Service Organization: K&B.
Flexible Budget Master Budget

(based on Sales (based on
actual of Activity budgeted 9,000
7,200 hours) Variance hours)
Revenue ................................ $648,000 $162,000 U $810,000

Costs:
Professional salaries ........... 320,000 80,000 F 400,000
Other variable costs ............ 96,000 24,000 F 120,000
Fixed costs .......................... 200,000 ______ 200,000
Total costs ........................ $616,000 104,000 F $720,000
Profit...................................... $ 32,000 $ 58,000 U $ 90,000

17-32. (30 min.) Profit Variance Analysis—Service Organization: K&B.
(1) (2) (3) (4) (5) (6)
Flexible Sales Master
Actual Cost Price Budget Activity Budget
(7,200 hrs.) Variances Variances (7,200 hrs.) Variance (9,000 hrs.)
Revenue ............................ $670,000 $22,000 F $648,000 $162,000 U $810,000
Professional salaries ......... 340,000 $20,000 U 320,000 80,000 F 400,000
Other variable costs .......... 98,000 2,000 U 96,000 24,000 F 120,000
Fixed costs ........................ 205,000 5,000 U 200,000 200,000
Profit..................................$ 27,000 $27,000 U $22,000 F $ 32,000 $ 58,000 U $ 90,000

806
17-33. (20 min.) Sales Price and Activity Variances: EZ-Tax.
Actual Flexible Budget

(AP x AQ) Price Variance (SP x AQ)
$800 x 5,200 hours
Partner $4,264,000 = $4,160,000
$104,000 F
$210 x 22,000 hours

Staff $4,510,000 = $4,620,000
$110,000 U
Flexible Master Budget

Budget
Quantity
AQ x (SP – SV) Mix Variance (SP – SV) x ASQ Variance SQ x (SP – SV)
a
5,200 x ($800 - $375) + [$425 x (5,000 ÷ 25,000) x 27,200] + 5,000 x $425 +
b
22,000 x ($210 - $120) [($90 x (20,000 ÷ 25,000) x 27,200] 20,000 x $90
= $4,190,000 = $4,270,400 = $3,925,000
$80,400 U $345,400 F
$265,000 F
Activity Variance
a $425 = $800 – $375.
b $90 = $210 – $120.

17-34. (10 min.) Variable Cost Variances: Harry’s Hotel.
Flexible Budget
Price Actual Inputs at Efficiency (Standard
Actual Costs Variance Standard Price Variance Allowed)
$12 x 2,750 = $12 x (15,000 ÷ 6)
$45,240 $33,000 = $30,000
$12,240 U $3,000 U
17-35. (10 min.) Investigating Variances: Harry’s Hotel.
Answers will vary. Clearly, the price variance is much larger than the efficiency variance
and it is likely this will be worth investigating. In case most of the prices are fixed by
contract (union wage contracts, for example), it might not be worth investigating.

808
Solutions to Problems
17-36. (20 min.) Variable Cost Variances: Materials Purchased And Used Are Not
Equal: Griffen Company.
Actual Flexible Budget

Inputs at (Standard
Price Standard Efficiency Allowed for
Actual Costs Variance Price Variance Good Output)
($5.30 x ($5.00 x
Purchase 115,300) 115,300)
Computations
$611,090 $576,500
$34,590 U*
$5* x 6* x 15,000*
$470,000 = $450,000
Usage
Computations $20,000 U
Notes:
* Given.
a. Material purchase price variance = AQ (purchased) x ($5.30 – $5.00) = $34,590;
AQ (purchased) = 115,300 pounds.
b. Variable overhead efficiency variance = [AQ (used) – AQ (allowed)] x $2.00 = $8,000 U.

[AQ (used) – (6 x 15,000 units)] x $2.00 = $8,000 U.
AQ (Used) = 94,000 pounds.
Direct material efficiency variance = [AQ (used) – AQ (allowed)] x $5.00
= [94,000 pounds – (6 x 15,000 units)] x $5.00 = $20,000 U.
Alternatively, because the variable overhead application rate is 40 percent (= $2 ÷ $5)
the standard price for materials, and because variable overhead is applied on the basis
of direct materials used, the direct material efficiency variance will be 2.5 (= 1.0 ÷ 0.40)
times the variable overhead efficiency variance.
c. From b, 94,000 pounds were used in August production.
d. Answers will vary. Clearly, the purchase price variance is larger than the efficiency
variance and it is likely this will be worth investigating. If this metal is a commodity
product (not specialized), it might just reflect market price fluctuations. In other words,
the company might not have much control over price. If this is the case, the efficiency
variance is where they should focus their attention. (Of course, it might be worthwhile
investigating both, depending on resources and controllability).

17-37. Sales Mix And Quantity Variances: Lake Cellars.
a. Price Variance = (Actual Price − Budgeted Price) x Actual Quantity:

Price
= (Actual Price − Budgeted Price) x Actual Quantity
Variety: Variance
Sauvignon $5,500 F = ($9.25 − $9.00) x 22,000
Blanc
Chardonnay 1,700 U = ($9.80 − $10.00) x 8,500
Riesling 1,150 F = ($7.10 – $7.00 ) x 11,500
$4,950 F
b. and c.
The actual prices are not relevant here. The mix and quantity variances are based on
standard (budgeted) contribution margin per unit.

22,000 x ($9.00 - $6.00) 42,000 x (20,000/40,000) x ($9.00 - $6.00) 20,000 x ($9.00 - $6.00)
+ 8,500 x ($10.00 - $7.50) + 42,000 x (8,000/40,000) x ($10.00 - $7.50) + 8,000 x ($10.00 - $7.50)
+ 11,500 x ($7.00 - $5.00) + 42,000 x (12,000/40,000) x ($7.00 - $5.00) + 12,000 x ($7.00 - $5.00)
= $110,250 = $109,200 = $104,000
$1,050 F $5,200 F
$6,250 U
Activity Variance

810
17-38. (40 min.) Analyze Performance for a Restaurant: Doug’s Diner.
Hint for working the problem: Use sales revenue as the basis for measuring volume.
($000)
Marketing &
Purchases Administrative Flexible Activity Master
Actual Variances Variances Budget Variance Budget
Sales revenuea ..................................................
$1,200 $1,200 $200 F $1,000
Variable costs:
Purchases ........................................................
780 $60 U 720 b 120 U 600
Hourly wages ...................................................
60 60 c 10 U 50
Franchise fee ...................................................
36 36 d 6U 30
Utilities .............................................................
76 $8 F 84 e 14 U 70
Total variable costs ............................................
$952 $60 U $8 F $900 $ 150 U $750
Contribution margin ............................................
$248 $60 U $8 F $300 $ 50 F $250
Fixed costs: .......................................................
Advertising ......................................................
100 100 100
Depreciation ...................................................
50 50 50
Lease ..............................................................
30 30 30
Salaries ..........................................................
30 30 30
Total fixed costs .................................................
$210 $ 210 $ 210
Operating profit ..................................................
$ 38 $60 U $8 F $ 90 $ 50 F $ 40
Notes on the following page.

17-37. (continued)
a Sales revenue is used as the basis of volume measurement because there are no price changes.
b $600
x $1,200
$1,000
c $50
x $1,200
$1,000
d $30
x $1,200
$1,000
e $70
x $1,200
$1,000

812
17-39. (30 min.) Nonmanufacturing Cost Variances: FSBCU.
Incidental office costs comprise the variable costs. Salaries and the fixed office costs are
all fixed. Variance analysis for the two classes of overhead is as follows:
Combined
Price and Flexible Budget
Efficiency (Standard Allowed
Actual Costs Variance for Actual Output)
Correspondence, $17,280 x 0.95 $45 x 384
Supplies, etc. = $16,416 = $17,280
$864 F
a
Loan processor and 0.5 x ($95,000 +
other costs $84,000 + $98,500 $70,000 + $195,000)
= $182,500 = $180,000
$2,500 U
Optional:
If computed, the production volume variance would be:
Budget Applied
$180,000 x (384 ÷ 360)
$180,000 = $192,000
$12,000 F
a 0.5 represents one-half year.

17-40. (30 min.) Performance Evaluation In Service Industries: Bay Area Bank.
Actual
Inputs at
Actual Price Standard Efficiency Flexible Activity Master
Costs Variance Price Variance Budget Variance Budget
New $30 x $30 x
Accounts 19,200 20,000
accounts accounts
= =
$572,250 (Ignored) $576,000 $600,000
$3,750 F $24,000 F
Account $0.45 x $0.45 x

Maintenance 45,000 43,200
$18,000 $17,700 = $20,250 = $19,440
$300 U $2,550 F $810 U
17-41. (10 min.) Investigating Variances: Bay Area Bank.
Answers will vary. From the variance analysis above, it would be useful to better
understand the reasons for the relatively large favorable activity variance for new accounts
and the efficiency variance for account maintenance. Recall that these are cost variances,
so the favorable variance means fewer accounts were opened than expected.

814
17-42. Revenue Analysis Using Industry Data and Multiple Product Lines: Peninsula
Candy Co.
a. Sales price and activity variances.

Flexible Master
budget budget
(AP – SV) x AQ (SP – SV) x AQ (SP – SV) x SQ
(1,600 x $0.03a)
+ (2,000 x $0.04)
$1,162 – $915b + (4,200 x $0.035) $1,200 – $920
= $247 = $275 = $280
$28 U $5 U
Sales price Sales activity

variance variance
a Unit contribution margins calculated from master budget panel as follows:
Unit margin = Contribution margin ÷ Sales units.

b $915 = [1,600 x ($140 ÷ 2,000) + 2,000 x ($320 ÷ 2,000) + 4,200 x ($460 ÷ 4,000)].
b. Two solutions are possible when calculating the market share variance, depending
upon the figure used for the left column. The examples in the text use the flexible
budget amount. However, those examples involve only one product, whereas this
problem has three products, and therefore a mix issue is present. In this situation,
another way to solve the problem would be to use the standard price times the actual
quantities at the standard mix. Both alternatives are given on the following page.

17-42b. (continued)
Contribution margin variance
Actual Quantities at
Standard Mix and Industry Master
Standard Prices Effect Budget
$280 x (76,000 ÷ 80,000)
$273a = $266 $280
$7 F $14 U
Market Share Industry Variance

Variance
$7 U
Quantity
Variance
Flexible Budget Industry Effect Master Budget

$275 $266 $280
$9 F $14 U
$5 U
Activity Variance
The $2 difference in the market share variance is explained by the difference in the mix.
a $273 = [7,800 x (2,000 ÷ 8,000) x ($60 ÷ 2,000) + 7,800 x (2,000 ÷ 8,000) x ($80 ÷ 2,000) + 7,800 x (4,000 ÷ 8,000) x
($140 ÷ 4,000)].
A shortcut is to multiply the actual number of bars by the average contribution margin per bar in the master
budget: 7,800 bars x ($280 ÷ 8,000 bars) = $273.

17-43. (20 min.) Sales Mix And Quantity Variances: Peninsula Candy Co.
Mix Quantity
Flexible Budget Variance Variance Master Budget
(SP – SV) x AQ (SP – SV) x ASQ (SP – SV) x SQ
(1,600 x $0.03) 2,000 (2,000 x $0.03)
(7,800 x x $0.03)
8,000
+ (2,000 x $0.04) + 2,000 + (2,000 x $0.04)
(7,800 x x $0.04)
8,000
+ (4,200 x $0.035) + 4,000 + (4,000 x $0.035)
(7,800 x x $0.035)
8,000
= $275 = $273 = $280
$2 F $7 U
$5 U
Activity Variance

17-44. (45 min.) Materials Mix And Yield Variances: Plano Products.
a. and b. Efficiency Variance
Actual Purchase Flexible

(AP x Price Mix Yield Production
Material AQ) Variance (SP x AQ) Variance (SP x ASQ) Variance Budget
a
Chem-A $9 x (.16 x
$9 x 104,400) =
b
16,960 = $9 x 16,704 = $9 x (20 x 800 )
$149,248 $152,640 $150,336 = $144,000
$3,392 F $2,304 U $6,336 U
$8,640 U
a
Chem-B $12 x (.48 x
$12 x 104,400) =
b
50,400 = $12 x 50,112 $12 x (60 x 800 )
$607,320 $604,800 = $601,344 = $576,000
$2,520 U $3,456 U $25,344 U
$28,800 U
a
Chem-C $24 x (.36 x
$24 x 104,400) =
b
37,040 $24 x 37,584 $24 x (45 x 800 )
$898,220 = $888,960 = $902,016 = $864,000
$9,260 U $13,056 F $38,016 U
$24,960 U
a
Standard mix: .16 = 20 ÷ 125; .48 = 60 ÷ 125; .36 = 45 ÷ 125.
b
Good output: 800 = 80,000 liters ÷ 100 liters in standard cost sheet.

17-44. (continued)
Efficiency Variance
Purchase Flexible
Price Mix Yield Production
Actual Variance (SP x AQ) Variance (SP x ASQ) Variance Budget
Total $1,654,788 $1,646,400 $1,653,696 $1,584,000
$8,388 U $7,296 F $69,696 U
$62,400 U

17-45. (30 min.) Labor Mix and Yield Variances: Matthews & Bros.
a. and b.
Efficiency Variance
Purchase Flexible
Price Mix Yield Production
Actual Variance (SP x AQ) Variance (SP x ASQ) Variance Budget
($44 x 1,660) + ($40 x 1,660) + ($40 x 3/12 x 6,060) + ($40 x 1,500) +
($38 x 2,600) + ($35 x 2,600) + ($35 x 4/12 x 6,060) + ($35 x 2,000) +
($26 x 1,800) ($25 x 1,800) ($25 x 5/12 x 6,060) ($25 x 2,500) =
= $218,640 = $202,400 = $194,425 $192,500
$16,240 U $7,975 U $1,925 U
$9,900 U
a
Standard mix: (3/12) = 1,500 ÷ 6,000; (4/12) = 2,000 ÷ 6,000; (5/12) = 2,500 ÷ 6,000.
17-46. (10 min.) Investigating Variances: Matthews & Bros.
Answers will vary. From the variance analysis above, the purchase price variance is fairly
large. Depending on how much control Matthews has over the wages, it might be useful to
investigate this variance. It appears that a more expensive mix of labor was used. The
managers should determine if this was necessitated by the mix of work being different (in
which case the revenues should be higher) or if this represents a problem in scheduling.

17-47. (20 min.) Derive Amounts for Profit Variance Analysis: Classics Ltd.
Hint: Use last quarter’s actual as master budget.
Actual (based Flexible Budget Master Budget
on actual Variable Sales (based on Sales (based on a
activity of Cost Price actual activity Activity prediction of
483 Variance Variance of 483 Variance 420 detailings)
detailings) detailings)
Sales revenue ....................................................
$68,400 $9,846 U $78,246 a $10,206 F $68,040
Less:
Variable costs .................................................
31,320 $558 F 31,878 b 4,158 U 27,720
Contribution margin ............................................
$37,080 $558 F $9,846 U $46,368 $6,048 F $40,320
aLast quarter price $68,040

= $162
= 420 detailings
$78,246 = $162 x 483 detailings
bLast quarter unit variable cost = $27,720 ÷ 420 detailings = $66; $31,878 = $66 x 483 detailings.
Although the two quarters’ contribution margins are similar, there are significant variances. This illustrates the need to
consider variance analysis even if bottom-line dollar amounts are similar to budget. Activity levels, prices, and other factors
might offset each other, but individually be significant.
The number of detailings increased by 63, which increased profit by $6,048. However, the actual average price was $141.61
(= $68,400 ÷ 483 detailings) so the average price per detailing decreased by $20.39 ($162.00 – $141.61). As a result,
contribution margin decreased by $3,240 (= $40,320 – $37,080).

17-48. (20 min.) Flexible budget: Oak Hill Township.
Flexible budget is based on actual activity of 94,500 miles for costs that vary per mile.
a. $8,505; $10 over budget.
$6,750 x (94,500 miles ÷ 75,000 miles) = $8,505

b. $756; $4 over budget.
$600 x (94,500 miles ÷ 75,000 miles) = $756
c. $5,000; equal to budget.
The assumption is that, within the relevant range, this is a fixed cost.
d. Decreased unit fixed costs.
Assuming that insurance, salaries and benefits, and depreciation are fixed costs, the
budgeted amount is $0.1387 per mile [($1,000 + $5,000 + $4,400) ÷ 75,000 miles].
The actual amount is $0.1129 per mile for 94,500 actual miles, which is a drop of
$0.0258. This is 84.3% of the total decrease from $0.2427 to $0.2121.

Solutions to Case
17-49. Comprehensive Overview of Budgets and Variances Racketeer, Inc.

The following solution is based on a report by Tom Terpstra.
Elmo's problem is that he thinks that the graph and the income statement measure the
same thing. Otto should have told him that they do not. The income statement presents
actual costs in a full-absorption costing format, while the profit graph is based on standard
costs in a variable costing format. These differences account for the difference in the profit
measurement.
Because the profit graph is based on standard costs, the profit it shows will be the actual
profit only in those very rare cases when the variances net out to zero. Racketeer has
some significant variances listed on the income statement, so Elmo should expect that the
actual profit would differ from the profit on the graph. These variances are:
Material ..............................................................
$490 U
Labor ..................................................................
392 U
Overhead ...........................................................
190 U
Selling and administrative ..................................
300 F
Total ...................................................................
$772 U
The overhead amount differs from the figure on the income statement, because the
income statement overhead variance includes a production volume variance of $470
(= $0.47 x 1,000). But that variance does not reflect a difference between actual and
budget or standard costs when fixed manufacturing costs are not unitized.
The other part of the difference between the two profit figures is explained by the
difference in accounting methods. Variable costing expenses fixed costs when they are
incurred. With full-absorption, the fixed costs are assigned to the units produced, and then
expensed in the period in which the units are sold. Racketeer treats each racket as having
a fixed cost of $0.47. For the 10,000 rackets sold, the fixed cost expense is $4,700 under
full-absorption costing. Additionally, the production volume variance of $470 is also
expensed during this period. Thus, $5,170 in fixed costs (aside from price variances) was
deducted from income on the income statement. Under variable costing, the only fixed
cost to be expensed is the standard cost for the period of $3,760 (also aside from price
variances). So, the use of different accounting methods results in a profit difference of
$1,410.
(Before Elmo starts to complain about the accountants' use of full-absorption, one should
remind him that, in those quarters when production exceeds sales, the full-absorption
method would expense less fixed costs than variable costing, so it evens out in the long
run.)

17-49. (continued)
Now the two results can be reconciled:
Profit per chart ....................................................
$20,940
Less:
Cost variances.................................................. 772
Additional fixed costs in full-absorption ............ 1,410
Profit per Income Statement ............................... $18,758
Besides failing to explain the profit graph, Otto also failed to set up a format to take
advantage of the standards he developed. The company should set up a chart showing
the actual results, the flexible budget, and the master budget. This would provide
information concerning the profit changes in relation to the change in sales volume.
Additionally, the manufacturing variances could be analyzed in greater detail, as shown in
Exhibits A and B on the following pages.

17-49. (continued)
Exhibit A Comparison of Master Budget to Actual Results.
Selling and
Manufacturing Administrative Sales Price Flexible Activity Master
Actual Variance Variance Variance Budget Variance Budget
Sales revenue .......................... $90,000 –0– –0– $90,000 $18,000 F $72,000
Less Variable Costs:
Materials ................................ 37,990 $ 490 U 37,500 7,500 U 30,000
Labor ...................................... 19,392 392 U 19,000 3,800 U 15,200
Overhead ............................... 1,440 140 U 1,300 260 U 1,040
Contribution Margin .................. $31,178 $1,022 U –0– –0– $32,200 $6,440 F $25,760
Less Fixed Costs:
Manufacturing ........................ 3,810 50 U 3,760 3,760
Selling and Administrative ...... 7,200 $300 F 7,500 7,500
Operating Profit ........................ $20,168 $1,072 U $300 F –0– $20,940 $ 6,440 F $14,500

17-49. (continued)
Exhibit B Manufacturing Cost Variances.
Actual Inputs
Price at Standard Efficiency
Actual Costs Variance Price Variance Flexible Budget
String $0.025 x 175,000 $0.03 x 175,000 $0.03 x 20 x
= $4,375 = $5,250 7,000 = $4,200
$875 F $1,050 U
Frames $3.15 x 7,100 = $3.15 x 7,100 = $3.15 x 7,000 =

$22,365 $22,365 $22,050
$-0- $315 U
Skilled $9.80 x 900 = $9.60 x 900 = $9.60 x .125 x

Labor $8,820 $8,640 7,000 = $8,400
$180 U $240 U
Unskilled $5.80 x 840 = $5.60 x 840 = $5.60 x .125 x

Labor $4,872 $4,704 7,000 = $4,900
$168 U $196 F
Variable Total Variable

Overhead Overhead ($0.10 + $.03)
$1,050 Variance x 7,000 = $910
$140 U
Production
Price Volume
Actual Costs Variance Budget Variance Applied
Fixed $0.47 x 8,000 = ($0.47 x 7,000)
Overhead $3,810 $3,760 = $3,290
$50 U $470 U

17-49. (continued)
The variance breakdown in Exhibits A and B highlights the areas that Elmo and Otto
should research. One area involves the strings. Is the combination of a favorable price
variance and unfavorable efficiency variance an indicator that low quality string was
purchased? Another point for investigation is the apparent waste of 100 racket frames. Is
there something in the production process that causes frames to break? Or are the
standards unrealistic? A third area is the labor efficiency variances. Why are the skilled
workers spending more time than budgeted, while the unskilled are spending less?
Finally, the relationship between labor efficiency and materials efficiency variances is
worth investigating, because use of substandard materials might result in an unfavorable
labor efficiency variance. These are the types of questions that should be raised as a
result of this variance analysis.


Additional Topics in Variance Analysis: Solutions To Review Questions

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Additional Topics in Variance Analysis: Solutions To Review Questions

Transféré par

Droits d'auteur :

Formats disponibles

17

Additional Topics in Variance Analysis

Solutions to Review Questions

©The McGraw-Hill Companies, Inc., 2017

©The McGraw-Hill Companies, Inc., 2017

©The McGraw-Hill Companies, Inc., 2017

©The McGraw-Hill Companies, Inc., 2017

©The McGraw-Hill Companies, Inc., 2017

Flexible Budget Market Standard Contribution Industry Master Budget

a. 15,000 fewer units = 52,500 fewer units – 37,500 more units.

17-22. (20 min.) Industry Volume And Market Share—Missing Data.

©The McGraw-Hill Companies, Inc., 2017

= $1,864,000 = $1,619,200 = $1,760,000

Flexible Budget Mix Quantity

= $5,472,000 = $5,712,000 = $5,100,000

©The McGraw-Hill Companies, Inc., 2017

Flexible Budget Mix Quantity

= $40,300 = $37,720 = $41,000

17-26. (20 min.) Sales Mix And Quantity Variances: Chow-4-Hounds.

Flexible Budget Mix Quantity

= $1,170,000 = $1,176,000 = $1,120,000

©The McGraw-Hill Companies, Inc., 2017

Efficiency Variance = $40,000 U

Beta $8.00 x $7.50 x $7.50 x (2/3 x 240,000) $7.50 x (80 x 2,000)

Efficiency Variance = $20,000 F

Total $1,612,000 $1,580,000 $1,600,000 = $1,600,000

Efficiency Variance = $20,000 F

©The McGraw-Hill Companies, Inc., 2017

Efficiency Variance = $3,600 U

Pest-O $25 x (0.005 a

Efficiency Variance = $6,000 F

Total $107,280 $111,000 $115,500 = $113,400

Efficiency Variance = $2,400 F

©The McGraw-Hill Companies, Inc., 2017

Efficiency Variance = $-0-

Unskilled $10 x $10 x (0.75 x 21,000) $10 x (6/60 x 180,000)

Efficiency Variance = $30,000 F

Total $365,000 $270,000 $262,500 = $300,000

Efficiency Variance = $30,000 F

©The McGraw-Hill Companies, Inc., 2017

Revenue ............................... $648,000a

©The McGraw-Hill Companies, Inc., 2017

Flexible Budget Master Budget

Revenue ................................ $648,000 $162,000 U $810,000

©The McGraw-Hill Companies, Inc., 2017

©The McGraw-Hill Companies, Inc., 2017

Actual Flexible Budget

$210 x 22,000 hours

Flexible Master Budget

a $425 = $800 – $375.

b $90 = $210 – $120.

©The McGraw-Hill Companies, Inc., 2017

17-35. (10 min.) Investigating Variances: Harry’s Hotel.

©The McGraw-Hill Companies, Inc., 2017

Actual Flexible Budget

b. Variable overhead efficiency variance = [AQ (used) – AQ (allowed)] x $2.00 = $8,000 U.

c. From b, 94,000 pounds were used in August production.

©The McGraw-Hill Companies, Inc., 2017

a. Price Variance = (Actual Price − Budgeted Price) x Actual Quantity:

Flexible Budget Mix Quantity

= $110,250 = $109,200 = $104,000

©The McGraw-Hill Companies, Inc., 2017

Notes on the following page.