Chapter 23: Q12RQ (page 1305)
Question:List the direct materials variances, and briefly describe each.
Answer
The direct material variances can be in the form of direct material cost variance and direct material efficiency variance
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Preparing a flexible budget performance report
Cell Plus Technologies manufactures capacitors for cellular base stations and other communication applications. The company’s July 2018 flexible budget shows output levels of 8,500, 10,000, and 12,000 units. The static budget was based on expected sales of 10,000 units.
Cell One Technologies | ||||
Flexible budget | ||||
For month ended July 31, 2018 | ||||
Budgeted amount per unit | ||||
Units | 8,500 | 10,000 | 12,000 | |
Sales revenue | \(24 | \)204,000 | \(240,000 | \)288,000 |
Variable expenses | 13 | 110,500 | 130,000 | 156,000 |
Contribution margin | 93,500 | 110,000 | 132,000 | |
Fixed expenses | 57,000 | 57,000 | 57,000 | |
Operating income | \(36,500 | \)53,000 | \(75,000 |
The company sold 12,000 units during July, and its actual operating income was as follows:
Cell One Technologies | |
Income statement | |
For the Month Ended July 31, 2018 | |
Sales revenue | \)295,000 |
Variable expenses | 161,100 |
Contribution margin | 133,900 |
Fixed expenses | 58,000 |
Operating income | $75,900 |
Requirements
1. Prepare a flexible budget performance report for July 2018.
2. What was the effect on Cell Plus’s operating income of selling 2,000 units more than the static budget level of sales?
3. What is Cell Plus’s static budget variance for operating income?
4. Explain why the flexible budget performance report provides more useful information to Cell Plus’s managers than the simple static budget variance. What insights can Cell Plus’s managers draw from this performance report?
Download an Excel template for this problem online in MyAccountingLab or at http://www.pearsonhighered.com/Horngren. Pilchuck Company manufactures tote bags and has provided the following information for September 2018:
Units | Actual Results | Static Budget |
Static Budget | 11,000 | 12,000 |
Sales Revenue | \(368,000 | \)384,000 |
Variable Costs | 183,000 | 198,000 |
Contribution Margin | 185,000 | 186,000 |
Fixed Costs | 76,000 | 77,184 |
Operating Income | \(109,000 | \)108,816 |
Preparing a flexible budget and computing standard cost variances
McKnight Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system. McKnight allocates overhead based on yards of direct materials. The company’s performance report includes the following selected data:
Static Budget (1,025 recliners) | Actual Results (1,005 recliners) | ||
Sales | (1,025 recliners * \(500 each) | \)512,500 | |
(1,005 recliners * \(495 each) | \)497,475 | ||
Variable Manufacturing Costs: | |||
Direct Materials | (6,150 yds. @ \(8.50/yard) | 52,275 | |
(6,300 yds. @ \)8.30/yard) | 52,290 | ||
Direct Labor | (10,250 DLHr @ \(9.20/DLHr) | 94,300 | |
(9,850 DLHr @ \)9.40/DLHr) | 92,590 | ||
Variable Overhead | (6,150 yds. @ \(5.10/yard) | 31,365 | |
(6,300 yds. @ \)6.50/yard) | 40,950 | ||
Fixed Manufacturing Costs: | |||
Fixed Overhead | 62,730 | 64,730 | |
Total Cost of Goods Sold | 240,670 | 250,560 | |
Gross Profit | \(271,830 | \)246,915 |
Requirements
1. Prepare a flexible budget based on the actual number of recliners sold.
2. Compute the cost variance and the efficiency variance for direct materials and for direct labor. For manufacturing overhead, compute the variable overhead cost, variable overhead efficiency, fixed overhead cost, and fixed overhead volume variances. Round to the nearest dollar.
3. Have McKnight’s managers done a good job or a poor job controlling materials, labor, and overhead costs? Why?
4. Describe how McKnight’s managers can benefit from the standard cost system.
Matching terms
Match each term to the correct definition.
Terms Definitions
a. Flexible budget
b. Flexible budget variance
c. Sales volume variance
d. Static budget
e. Variance
1. A summarized budget for several levels of volume thatseparates variable costs from fixed costs.
2. A budget prepared for only one level of sales.
3. The difference between an actual amount and thebudgeted amount.
4. The difference arising because the company actuallyearned more or less revenue, or incurred more or lesscost, than expected for the actual level of output.
5. The difference arising only because the number ofunits actually sold differs from the static budget units.
Review your results from Problem P23-28A. Moss’s standard and actual sales price per mug is $3. Prepare the standard cost income statement for July 2018.
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