Chapter 23: Q1CA (page 1323)
In 75 words or fewer, explain what a cost variance is and describe its potential causes.
Cost variance gauges how closely a business keeps its actual costs within the acceptable range.
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Question:How is the fixed overhead volume variance different from the other variances?
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.
Question: How do flexible budgets differ from static budgets?
Martin, Inc. manufactures lead crystal glasses. The standard direct labor time is 0.5 hours per glass, at a cost of \(18 per hour. The actual results for one month’s production of 6,500 glasses were 0.2 hours per glass, at a cost of \)11 per hour. Calculate the direct labor cost variance and the direct labor efficiency variance.
Question:Match the variance to the correct definition.
Variance Definition
2. Cost variance
3. Efficiency variance
4. Flexible budget variance
5. Sales volume variance
6. Static budget variance
a. The difference between the expected results in the flexible budget for the actual units sold and the static budget.
b. The difference between actual results and the expected results in the flexible budget for the actual units sold.
c. Measures how well the business keeps unit costs of material and labor inputs within standards.
d. The difference between actual results and the expected results in the static budget.
e. Measures how well the business uses its materials or human resources
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