CHAPTER 7
FLEXIBLE BUDGETS, DIRECT-COST VARIANCES,
AND MANAGEMENT CONTROL
7-16
(20–30 min.) Flexible budget.
Variance Analysis for Brabham Enterprises for August 2012
Units (tires) sold
Revenues
Variable costs
Contribution margin
Fixed costs
Actual
Results
(1)
g
2,800
a
$313,600
d
229,600
84,000
g
50,000
FlexibleBudget
Variances
(2) = (1) – (3)
0
$ 5,600 F
22,400 U
16,800 U
4,000 F
Flexible
Budget
(3)
2,800
b
$308,000
e
207,200
100,800
g
54,000
Sales-Volume
Variances
(4) = (3) – (5)
200 U
$22,000 U
14,800 F
7,200 U
0
Static
Budget
(5)
g
3,000
c
$330,000
f
222,000
108,000
g
54,000
Operating income
$ 34,000
$12,800 U
$ 46,800
$ 7,200 U
$ 54,000
$12,800 U
$ 7,200 U
Total flexible-budget variance Total sales-volume variance
$20,000 U
Total static-budget variance
a
$112 × 2,800 = $313,600
$110 × 2,800 = $308,000
c
$110 × 3,000 = $330,000
d
Given. Unit variable cost = $229,600 ÷ 2,800 = $82 per tire
e
$74 × 2,800 = $207,200
f
$74 × 3,000 = $222,000
g
Given
b
2.
The key information items are:
Units
Unit selling price
Unit variable cost
Fixed costs
Actual
2,800
$ 112
$
82
$50,000
Budgeted
3,000
$ 110
$
74
$54,000
The total static-budget variance in operating income is $20,000 U. There is both an unfavorable
total flexible-budget variance ($12,800) and an unfavorable sales-volume variance ($7,200).
The unfavorable sales-volume variance arises solely because actual units manufactured
and sold were 200 less than the budgeted 3,000 units. The unfavorable flexible-budget variance
of $12,800 in operating income is due primarily to the $8 increase in unit variable costs. This
increase in unit variable costs is only partially offset by the $2 increase in unit selling price and
the $4,000 decrease in fixed costs.
7-1
7-18
1.
(25–30 min.) Flexible-budget preparation and analysis.
Variance Analysis for Bank Management Printers for September 2012
Level 1 Analysis
Actual
Results
(1)
12,000
a
$252,000
d
84,000
168,000
150,000
$ 18,000
Units sold
Revenue
Variable costs
Contribution margin
Fixed costs
Operating income
Static-Budget
Variances
(2) = (1) – (3)
3,000 U
$48,000 U
36,000 F
12,000 U
5,000 U
$17,000 U
Static
Budget
(3)
15,000
c
$300,000
f
120,000
180,000
145,000
$ 35,000
$17,000 U
Total static-budget variance
2.
Level 2 Analysis
Units sold
Revenue
Variable costs
Contribution margin
Fixed costs
Actual
Results
(1)
12,000
a
$252,000
d
84,000
168,000
150,000
Operating income
$ 18,000
FlexibleBudget
Variances
(2) = (1) – (3)
0
$12,000 F
12,000 F
24,000 F
5,000 U
$19,000 F
Sales
Flexible
Volume
Static
Budget
Variances
Budget
(3)
(4) = (3) – (5)
(5)
12,000
3,000 U
15,000
b
c
$240,000
$60,000 U $300,000
e
f
96,000
24,000 F
120,000
144,000
36,000 U
180,000
145,000
0
145,000
$ (1,000)
$36,000 U
$ 35,000
$19,000 F
$36,000 U
Total flexible-budget
Total sales-volume
variance
variance
$17,000 U
Total static-budget variance
a
12,000 × $21 = $252,000
b
12,000 × $20 = $240,000
c
15,000 × $20 = $300,000
d
12,000 × $7 = $ 84,000
12,000 × $8 = $ 96,000
f
15,000 × $8 = $120,000
e
3.
Level 2 analysis breaks down the static-budget variance into a flexible-budget variance
and a sales-volume variance. The primary reason for the static-budget variance being
unfavorable ($17,000 U) is the reduction in unit volume from the budgeted 15,000 to an actual
12,000. One explanation for this reduction is the increase in selling price from a budgeted $20 to
an actual $21. Operating management was able to reduce variable costs by $12,000 relative to
the flexible budget. This reduction could be a sign of efficient management. Alternatively, it
could be due to using lower quality materials (which in turn adversely affected unit volume).
7-2
7-22 (15 min.) Materials and manufacturing labor variances.
Actual Costs
Incurred
(Actual Input
Quantity
× Actual Price)
Direct Materials
Flexible Budget
(Budgeted Input
Actual Input
Quantity Allowed for
Quantity
Actual Output
× Budgeted Price
× Budgeted Price)
$200,000
$214,000
$225,000
$14,000 F
$11,000 F
Price variance
Efficiency variance
$25,000 F
Flexible-budget variance
Direct
Mfg. Labor
$90,000
$86,000
$80,000
$4,000 U
$6,000 U
Price variance
Efficiency variance
$10,000 U
Flexible-budget variance
7-23 (30 min.) Direct materials and direct manufacturing labor variances.
1.
May 2011
Units
Direct materials
Direct labor
Total price variance
Total efficiency variance
Actual
Results
(1)
550
$12,705.00
$ 8,464.50
Price
Variance
(2) = (1)–(3)
$1,815.00 U
$ 104.50 U
$1,919.50 U
Actual
Quantity
 Budgeted
Price
(3)
$10,890.00a
$ 8,360.00c
Efficiency
Variance
(4) = (3) – (5)
$990.00 U
$440.00 F
Flexible
Budget
(5)
550
$9,900.00b
$8,800.00d
$550.00 U
7,260 meters  $1.50 per meter = $10,890
550 lots  12 meters per lot  $1.50 per meter = $9,900
c
1,045 hours  $8.00 per hour = $8,360
d
550 lots  2 hours per lot  $8 per hour = $8,800
a
b
Total flexible-budget variance for both inputs = $1,919.50U + $550U = $2,469.50U
Total flexible-budget cost of direct materials and direct labor = $9,900 + $8,800 = $18,700
Total flexible-budget variance as % of total flexible-budget costs = $2,469.50  $18,700 = 13.21%
7-3
2.
May
2012
Units
Direct materials
Direct manuf. labor
Total price variance
Total efficiency variance
Actual
Results
(1)
550
$11,828.36a
$ 8,295.21d
Price
Variance
(2) = (1) – (3)
$1,156.16 U
$ 102.41 U
$1,258.57 U
Actual
Quantity
 Budgeted
Price
(3)
Efficiency
Variance
(4) = (3) – (5)
$10,672.20b
$ 8,192.80e
$772.20 U
$607.20 F
Flexible
Budget
(5)
550
$9,900.00c
$8,800.00c
$165.00 U
Actual dir. mat. cost, May 2012 = Actual dir. mat. cost, May 2011  0.98  0.95 = $12,705  0.98  0.95 = $11.828.36
Alternatively, actual dir. mat. cost, May 2012
= (Actual dir. mat. quantity used in May 2011  0.98)  (Actual dir. mat. price in May 2011  0.95)
= (7,260 meters  0.98)  ($1.75/meter  0.95)
= 7,114.80  $1.6625 = $11,828.36
b
(7,260 meters  0.98)  $1.50 per meter = $10,672.20
c
Unchanged from 2011.
d
Actual dir. labor cost, May 2012 = Actual dir. manuf. cost May 2011  0.98 = $8,464.50  0.98 = $8,295.21
Alternatively, actual dir. labor cost, May 2012
= (Actual dir. manuf. labor quantity used in May 2011  0.98)  Actual dir. labor price in 2011
= (1,045 hours  0.98)  $8.10 per hour
= 1,024.10 hours  $8.10 per hour = $8,295.21
e
(1,045 hours  0.98)  $8.00 per hour = $8,192.80
a
Total flexible-budget variance for both inputs = $1,258.57U + $165U = $1,423.57U
Total flexible-budget cost of direct materials and direct labor = $9,900 + $8,800 = $18,700
Total flexible-budget variance as % of total flexible-budget costs = $1,423.57  $18,700 = 7.61%
3.
Efficiencies have improved in the direction indicated by the production manager—but, it
is unclear whether they are a trend or a one-time occurrence. Also, overall, variances are still
7.6% of flexible input budget. GloriaDee should continue to use the new material, especially in
light of its superior quality and feel, but it may want to keep the following points in mind:
 The new material costs substantially more than the old ($1.75 in 2011 and $1.6625 in
2012 vs. $1.50 per meter). Its price is unlikely to come down even more within the
coming year. Standard material price should be re-examined and possibly changed.
 GloriaDee should continue to work to reduce direct materials and direct
manufacturing labor content. The reductions from May 2011 to May 2012 are a good
development and should be encouraged.
7-4
7-24
(30 min.) Price and efficiency variances, journal entries.
1. Direct materials and direct manufacturing labor are analyzed in turn:
Actual Costs
Incurred
(Actual Input Quantity
× Actual Price)
Actual Input Quantity
× Budgeted Price
Purchases
Direct
Materials
Usage
a
(100,000 × $4.65 )
$465,000
(100,000 × $4.50)
$450,000
(98,055 × $4.50)
$441,248
$15,000 U
Price variance
Direct
Manufacturing
Labor
(4,900 × $31.5b)
$154,350
b
(9,850 × 10 × $4.50)
$443,250
$2,002 F
Efficiency variance
(4,900 × $30)
$147,000
$7,350 U
Price variance
a
Flexible Budget
(Budgeted Input
Quantity Allowed for
Actual Output
× Budgeted Price)
(9,850 × 0.5 × $30) or
(4,925 × $30)
$147,750
$750 F
Efficiency variance
$465,000 ÷ 100,000 = $4.65
$154,350 ÷ 4,900 = $31.5
2.
Direct Materials Control
Direct Materials Price Variance
Accounts Payable or Cash Control
450,000
15,000
Work-in-Process Control
Direct Materials Control
Direct Materials Efficiency Variance
443,250
Work-in-Process Control
Direct Manuf. Labor Price Variance
Wages Payable Control
Direct Manuf. Labor Efficiency Variance
147,750
7,350
465,000
441,248
2,002
154,350
750
3.
Some students’ comments will be immersed in conjecture about higher prices for
materials, better quality materials, higher grade labor, better efficiency in use of materials, and so
forth. A possibility is that approximately the same labor force, paid somewhat more, is taking
slightly less time with better materials and causing less waste and spoilage.
A key point in this problem is that all of these efficiency variances are likely to be
insignificant. They are so small as to be nearly meaningless. Fluctuations about standards are
bound to occur in a random fashion. Practically, from a control viewpoint, a standard is a band
or range of acceptable performance rather than a single-figure measure.
4.
The purchasing point is where responsibility for price variances is found most often. The
production point is where responsibility for efficiency variances is found most often. The
7-5
Monroe Corporation may calculate variances at different points in time to tie in with these
different responsibility areas.
7-26
(2030 min.) Materials and manufacturing labor variances, standard costs.
1.
Direct Materials
Actual Costs
Incurred
(Actual Input Quantity
× Actual Price)
Actual Input Quantity
× Budgeted Price
(3,700 sq. yds. × $5.10)
$18,870
(3,700 sq. yds. × $5.00)
$18,500
Flexible Budget
(Budgeted Input
Quantity Allowed for
Actual Output
× Budgeted Price)
(2,000 × 2 × $5.00)
(4,000 sq. yds. × $5.00)
$20,000
$370 U
Price variance
$1,500 F
Efficiency variance
$1,130 F
Flexible-budget variance
The unfavorable materials price variance may be unrelated to the favorable materials
efficiency variance. For example, (a) the purchasing officer may be less skillful than assumed in
the budget, or (b) there was an unexpected increase in materials price per square yard due to
reduced competition. Similarly, the favorable materials efficiency variance may be unrelated to
the unfavorable materials price variance. For example, (a) the production manager may have
been able to employ higher-skilled workers, or (b) the budgeted materials standards were set too
loosely. It is also possible that the two variances are interrelated. The higher materials input price
may be due to higher quality materials being purchased. Less material was used than budgeted
due to the high quality of the materials.
Direct Manufacturing Labor
Actual Costs
Incurred
(Actual Input
Quantity
Actual Input Quantity
× Actual Price)
× Budgeted Price
(900 hrs. × $9.80)
$8,820
(900 hrs. × $10.00)
$9,000
$180 F
Price variance
Flexible Budget
(Budgeted Input
Quantity Allowed for
Actual Output
× Budgeted Price)
(2000 × 0.5 × $10.00)
(1,000 hrs. × $10.00)
$10,000
$1,000 F
Efficiency variance
$1,180 F
Flexible-budget variance
The favorable labor price variance may be due to, say, (a) a reduction in labor rates due
to a recession, or (b) the standard being set without detailed analysis of labor compensation. The
favorable labor efficiency variance may be due to, say, (a) more efficient workers being
employed, (b) a redesign in the plant enabling labor to be more productive, or (c) the use of
higher quality materials.
7-6
2.
Control
Point
Purchasing
Actual Costs
Incurred
(Actual Input
Quantity
× Actual Price)
(6,000 sq. yds.× $5.10)
$30,600
Actual Input Quantity
× Budgeted Price
(6,000 sq. yds. × $5.00)
$30,000
Flexible Budget
(Budgeted Input
Quantity Allowed
for Actual Output
× Budgeted Price)
$600 U
Price variance
Production
(3,700 sq. yds.× $5.00)
$18,500
(2,000 × 2 × $5.00)
$20,000
$1,500 F
Efficiency variance
Direct manufacturing labor variances are the same as in requirement 1.
7-27
(1525 min.) Journal entries and T-accounts (continuation of 7-26).
For requirement 1 from Exercise 7-26:
a.
Direct Materials Control
Direct Materials Price Variance
Accounts Payable Control
To record purchase of direct materials.
18,500
370
18,870
b. Work-in-Process Control
Direct Materials Efficiency Variance
Direct Materials Control
To record direct materials used.
20,000
1,500
18,500
c. Work-in-Process Control
10,000
Direct Manufacturing Labor Price Variance
Direct Manufacturing Labor Efficiency Variance
Wages Payable Control
To record liability for and allocation of direct labor costs.
Direct
Materials Control
(a) 18,500 (b) 18,500
Work-in-Process Control
(b) 20,000
(c) 10,000
Direct Materials
Price Variance
(a) 370
Direct Manufacturing
Labor Price Variance
(c) 180
7-7
180
1,000
8,820
Direct Materials
Efficiency Variance
(b) 1,500
Direct Manuf. Labor
Efficiency Variance
(c) 1,000
Wages Payable Control
(c) 8,820
Accounts Payable Control
(a) 18,870
For requirement 2 from Exercise 7-26:
The following journal entries pertain to the measurement of price and efficiency variances when
6,000 sq. yds. of direct materials are purchased:
a1. Direct Materials Control
Direct Materials Price Variance
Accounts Payable Control
To record direct materials purchased.
30,000
600
a2. Work-in-Process Control
Direct Materials Control
Direct Materials Efficiency Variance
To record direct materials used.
20,000
30,600
Direct
Materials Control
(a1) 30,000
(a2) 18,500
18,500
1,500
Direct Materials
Price Variance
(a1) 600
Accounts Payable Control
(a1) 30,600
Work-in-Process Control
(a2) 20,000
Direct Materials
Efficiency Variance
(a2) 1,500
The T-account entries related to direct manufacturing labor are the same as in requirement 1. The
difference between standard costing and normal costing for direct cost items is:
Direct Costs
Standard Costs
Standard price(s)
× Standard input
allowed for actual
outputs achieved
Normal Costs
Actual price(s)
× Actual input
These journal entries differ from the normal costing entries because Work-in-Process Control is
no longer carried at “actual” costs. Furthermore, Direct Materials Control is carried at standard
unit prices rather than actual unit prices. Finally, variances appear for direct materials and direct
manufacturing labor under standard costing but not under normal costing.
7-8
7-30
1.
(30 min.) Flexible budget, direct materials and direct manufacturing labor
variances.
Variance Analysis for Tuscany Statuary for 2011
Units sold
Direct materials
Flexible
Actual
Budget
Results
Variances
(1)
(2) = (1) – (3)
5,500a
0
$ 668,800
Sales
Volume
Variances
(4) = (3) – (5)
500 U
Flexible
Budget
(3)
5,500
$ 8,800 U $ 660,000 b $ 60,000 F
a
Direct manufacturing labor
952,750
Fixed costs
1,180,000a
Total costs
$2,801,550
Static
Budget
(5)
6,000a
$ 720,000c
d
9,750 F
962,500
87,500 F
a
20,000 F 1,200,000
0
$20,950 F $2,822,500 $147,500 F
1,050,000e
1,200,000a
$2,970,000
$20,950 F
$147,500 F
Flexible-budget variance
Sales-volume variance
$168,450 F
Static-budget variance
a
Given
$120/unit × 5,500 units = $660,000
c
$120/unit × 6,000 units = $720,000
d
$175/unit × 5,500 units = $962,500
e
$175/unit × 6,000 units = $1,050,000
b
2.
Direct materials
Actual Incurred
(Actual Input
Quantity
 Actual Price)
$668,800a
Actual Input
Quantity
 Budgeted Price
$704,000b
$35,200 F
Price variance
Flexible Budget
(Budgeted Input
Quantity Allowed for
Actual Output 
Budgeted Price)
$660,000c
$44,000 U
Efficiency variance
$8,800 U
Flexible-budget variance
Direct manufacturing labor
$952,750d
$925,000e
$962,500f
$27,750 U
$37,500 F
Price variance
Efficiency variance
$9,750 F
Flexible-budget variance
a
70,400 pounds × $9.5/pound = $668,800
70,400 pounds × $10/pound = $704,000
c
5,500 statues × 12 pounds/statue × $10/pound = 66,000 pounds × $10/pound = $660,000
d
18,500 hours × $51.50/hour = $952,750
e
18,500 hours × $50/hour = $925,000
f
5,500 statues × 3.5 hours/statue × $50/hour = 19,250 hours × $50/hour = $962,500
b
7-9
7-37
(20 min.)
Direct materials and manufacturing labor variances, journal entries.
1.
Direct Materials:
Wool
Actual Costs
Incurred
(Actual Input
Quantity
× Actual Price)
(given)
Actual Input
Quantity
× Budgeted Price
3,040  $3.50
Flexible Budget
(Budgeted Input
Quantity Allowed
for Actual Output
× Budgeted Price)
235  12  $3.50
$10,336
$10,640
$9,870
$304 F
$770 U
Price variance
Efficiency variance
$466 U
Flexible-budget variance
Direct Manufacturing Labor:
Actual Costs
Incurred
(Actual Input
Actual Input
Quantity
Quantity
× Actual Price)
× Budgeted Price
(given)
925  $10
$9,620
$9,250
Flexible Budget
(Budgeted Input
Quantity Allowed
for Actual Output
× Budgeted Price)
235  4  $10
$9,400
$370 U
$150 F
Price variance
Efficiency variance
$220 U
Flexible-budget variance
2.
Direct Materials Price Variance (time of purchase = time of use)
Direct Materials Control
10,640
Direct Materials Price Variance
304
Accounts Payable Control or Cash
10,336
Direct Materials Efficiency Variance
Work in Process Control
Direct Materials Efficiency Variance
Direct Materials Control
9,870
770
10,640
7-10
Direct Manufacturing Labor Variances
Work in Process Control
Direct Mfg. Labor Price Variance
Direct Mfg. Labor Efficiency Variance
Wages Payable or Cash
9,400
370
150
9,620
3.
Plausible explanations for the above variances include:
Shayna paid a little less for the wool, but the wool was lower quality (more knots in the yarn that
had to be cut out) and workers had to use more of it. Shayna used more experienced workers in
April than she usually does. This resulted in payment of higher wages per hour, but the new
workers were more efficient and took less hours than normal. However, overall the higher wage
rates resulted in Shayna’s total wage bill being higher than expected.
7-11