Round Corporation (“RC”) produces a line of special carbon fiber hula hoops.

These hoops are produced in batches, where machines and molds have to be set up for every batch.
Setup costs are batch-level costs because they are associated with batches rather than individual units of products.
A separate Setup Department is responsible for setting up machines and molds for various colours and styles of hul

Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the numb
The following information pertains to October 2016.

Static-budget amount Actual amount

Hula hoops produced and sold 80,000 70,000
Batch size (no of units/ batch) 500 500
Set-up hours per batch 8 7
Variable overhead cost per setup hour $32 $30
Total fixed setup overhead costs $45,000 $42,000
Number of batches 160 140

(a) Compute the efficiency and spending variances for variable setup overhead costs.

Actual input costs = Actual Hours x Actual Rate

= (Number of actual batches x Actual set up hours per batch) x Actual Rate
= (140 batches x 7 hours) x $30
= $29,400

Actual input at standard cost = Actual Hours x Standard Rate

= (Number of actual batches x Actual set up hours per batch) x Standard Ra
= (140 batches x 7 hours) x $32
= $31,360

Spending variance = Difference between Actual input and Actual input at standard cost
= $29,400 - $31,360
= $1,960 Favourable

Flexible-budget amount = Standard Hours x Standard Rate

= (Number of standard batches x Standard set up hours per batch) x Standa
= (140 batches x 8 hours) x $32
= $35,840

Efficiency variance = Difference between Actual input at standard cost and Flexible-budget amo
= $31,360 - $35,840
= $4,480 Favourable

(b) Compute the spending variance for fixed setup overhead costs.
 Spending variance = Difference between budgeted fixed overhead costs and actual fixed overhe
= $45,000 - $42,000
= $3,000 Favourable

(c) Compute the production-volume variance for fixed setup overhead costs.
Predetermined Standard
Overhead Rate = Budgeted total fixed overhead costs/ denominator volume
= Budgeted total fixed overhead costs/ Total Budgeted set-up hours in the St
= $45000/(160 batches x 8 hours)
= $35.16 per set-up hour

Fixed overhead applied = Predetermined standard overhead rate x Standard set-up hours for actual
= $35.16 x (140 batches x 8 hours)
= $39,375 [amount recorded in JE, Dr WIP]

Production volume variance = Difference between fixed overhead applied and budgeted fixed overhead
= $39,375 - $45,000
= $5,625 Unfavourable

(d) Tom, RC’s production manager, believes he has done well by incurring less overhead costs.
Do you agree with his assessment? Explain why less overhead costs were incurred than budgeted.

Agree to a limited extent. [Only calculating set-up costs; within his control --
Variable OH
Favourable spending variance Favourable efficiency variance
Spending less than expected for Results from the lower (actual) set-up hour
overhead items. per batch (production efficiency).

Possible reasons include: Possible reasons include:

Tom has done well in controlling costs Could indicate that the set-up hours may
be an ineffective cost driver

Possible budgetary slack when estimating

set up hours (set up hours per batch of 8H
vs 7H)
Lastly, as the production manager, he is also in charge of other costs such as Direct labour and Direct materials and
on top of MOH variances

7hrs vs 8 hrs
Companies cannot ignore signficant variances.
Should investigate whether the 8H estimated is correct and whether the actual 7H is real
What is the impact of the 1 hour on other manufacturing costs or other areas?
o be set up for every batch.
es rather than individual units of products.
molds for various colours and styles of hula hoops.

osts that are fixed with respect to the number of setup-hours.

Flexible-budget amount
70,000
500
8
32
45,000
140

overhead costs.

ual set up hours per batch) x Actual Rate

ual set up hours per batch) x Standard Rate

and Actual input at standard cost or (AR-SR)*AH

[actual rate < standard rate --> favourable]

Standard set up hours per batch) x Standard rate

at standard cost and Flexible-budget amount or (AH-SH)*SR

[actual hours < standard hours --> favourable]

ed overhead costs and actual fixed overhead costs incurred

[actual costs incurred < budgeted --> favourable]

osts/ denominator volume

osts/ Total Budgeted set-up hours in the Static budget cost driver = setup hous

ad rate x Standard set-up hours for actual production

t recorded in JE, Dr WIP]

ad applied and budgeted fixed overhead

[actual production < budgeted production level --> unfavourable]

[Indication that the company actual utilisation capacity is lesser than budgeted]
urring less overhead costs.
s were incurred than budgeted.

alculating set-up costs; within his control --> all favourable]

Fixed OH
Favourable spending variance Unfavourable production-volume variance
Spending less than expected for FOH items. No significance over cost control.

Possible reasons include: Inability to operate at planned activity level.

Tom's ability to control costs [Actual production level is less than the
budgeted production level]
Budgeted for maintenance cost but did not occur
Unused planned capacity.
Changes in rates (utilities)

Budgetary Slack when budgeting for fixed Need more details about the cause of lower
overheads than expected activity level to determine
whether this is controllable by Tom.

Possible reasons include:

Within Tom's control (e.g. no preventive
maintenance and machine break down needing
emergency repairs)

Outside of Tom's control

 as Direct labour and Direct materials and therefore should be evaluated on these

ctual 7H is real
Presient of Martell Company, Kim Clark, said:
- Salespeople did a good job in meeting sales budget this year
- Production people did a good job in controlling costs
- Our $18,300 overall manufacturing cost variance is only 1.2% of the $1,536,000 standard cost of products made during the ye
- That is well within the 3% parameter set by management for acceptable variances.
- Looks like everyone will be in line for a bonus this year

Standard Cost Card - per unit of product

Unit input cost Quantity Cost per unit
Direct Material $8.45 2 $16.90
Direct Labour $16.00 1.4 $22.40
Variable overhead $2.50 1.4 $3.50
Fixed overhead $6.00 1.4 $8.40
Standard cost per unit $51.20

a. The company manufactured 30,000 units of product during the year.

b. A total of 64,000 feet of material was purchased during the year at a cost of $8.55 per foot. All of this material was used to ma
c. The company worked 43,500 direct labour-hours during the year at a direct labour cost of $15.80 per hour.
d. Overhead is applied to products on the basis of standard diret labou-hours. Data relating to manufacturing overhead costs fo

Denominator activity (DLH) 35,000

Budgeted fixed overhead costs (from overhead flexible budget) $210,000
Actual variable overhead costs incurred $108,000
Actual fixed overhead costs incurred $211,800

1. Compute direct materials price and quantity variances for the year.

Actual Standard
Production level 30,000
Material needed per unit 2
Total units of materials used 64,000 60,000
Cost per unit $8.55 $8.45

Actual Input at Flexible-Budget

Actual Input Costs Standard Cost Amount
(AQ x AP) (AQ x SP) (SQ x SP)
64,000 x $8.55 = 64,000 x $8.45 = 60,000 x $8.45 =
Direct material $547,200 $540,800 $507,000

Price Variance = Difference between Actual input costs and Actual input costs at standard costs
= $547,200 - $540,800
= $6,400 Unfavourable [actual cost per unit > standard cost per unit]
 Quantity Variance = Difference between Actual input at standard costs and Flexible budget amount
$540,800 - $507,000
= $33,800 Unfavourable [actual qty > standard qty]

2. Compute direct labour rate and efficiency variances for the year.
Actual Standard
Production level 30,000
DLH needed per unit 1.4
Total DLH 43,500 42,000
Rate per DLH $15.80 $16.00

Actual Input at Flexible-Budget

Actual Input Costs Standard Cost Amount
(AH x AR) (AH x SR) (SH x SR)
43,500 x $15.80 = 43,500 x $16 = 42,000 x $16 =
Direct labour $687,300 $696,000 $672,000

Rate Variance = Difference between Actual input costs and Actual input costs at standard costs
= $687,300 - $696,000
= $8,700 Favourable [actual rate per dlh < standard rate per dlh]

Efficiency Variance = Difference between Actual input at standard costs and Flexible budget amount
= $696,000 - $672,000
= $24,000 Unfavourable [actual dlh > standard dlh]

3. For manufacturing overhead compute:

(a) The variable overhead rate and efficiency variances for the year.
Actual Standard
Production level 30,000
DLH needed per unit 1.4
Total DLH 43,500 42,000
VOH rate per DLH $2.48 $2.50
Total VOH $108,000 $105,000

Actual Input at Flexible-Budget

Actual Input Costs Standard Cost Amount
(AH x AR) (AH x SR) (SH x SR)
43,500 x $2.48 = 43,500 x $2.50 = 42,000 x $2.50 =
VOH $108,000 $108,750 $105,000

Rate Variance = Difference between Actual input costs and Actual input costs at standard costs
= $108,750 - $108,000
= $750 Favourable [actual voh rate per dlh < standard voh rate per dlh]
 Efficiency Variance = Difference between Actual input at standard costs and Flexible budget amount
= $108,750 - $105,000
= $3,750 Unfavourable [actual dlh > standard dlh]

(b) The fixed overhead budget and volume variances for the year

Pre-determined OH rate = $6 per DLH Budgeted FOH / denominator activity level =

SH for actual production = 42,000 DLH 1.4 hrs x 30,000 units

Actual FOH Incurred Budgeted FOH FOH applied

(given) (given) 42,000 x $6 =
FOH $211,800 $210,000 $252,000

Spending Variance = Difference between Actual FOH incurred and Budgeted FOH costs
= $211,800 - $210,000
= $1,800 Unfavourable

Production Volume Variance

= Difference between Budgeted FOH costs and FOH applied
= $252,000 - $210,000
= $42,000 Favourable

4. Total the variances you have computed and compare the net amount with the $18,300 mentioned by the president.
Do you agree that bonuses should be given to everyone for good cost control during the year? Explain.

Direct Materials %
Price Variance $6,400 Unfavourable 1.18%
Quantity Variance $33,800 Unfavourable 6.67%
Direct Labour
Rate Variance $8,700 Favourable 1.25%
Efficiency Variance $24,000 Unfavourable 3.57%
VOH
Rate Variance $750 Favourable 0.69%
Efficiency Variance $3,750 Unfavourable 3.57%
FOH
Spending Variance $1,800 Unfavourable 0.86%
Production Volume Variance $42,000 Favourable
Hire lower-skilled workers (tight labour market, HR manager's performance issues)
> Leads to favourable labour rate variance$18,300
Total Variance (pay less than standard rate used)
Unfavourable 1.19%
> Affects labour efficiency variance unfavourably since lower-skilled workers take longer time to produce
> Lower-skilled workers waste materials so they produce products with sub-par quality, which don't clear quality control checks,
so need rework and additional materials (unfavourable material quantity variance).
> In most companies, purchases are planned in bulks. Purchases have to be made if more raw materials are used than
Reason
expected. that leadcompany
When to direct materials & labour
make ad-hoc variance:
purchases (due to higher than expected usage), these low quantity purchases will not
likely to land us a favourable price, thus resulting in small unfavourable material price variance.
0 standard cost of products made during the year.

.55 per foot. All of this material was used to manufacture the 30,000 units. There is no beginning/ ending inventories for the year.
our cost of $15.80 per hour.
ta relating to manufacturing overhead costs follow:

input costs at standard costs

ost per unit > standard cost per unit]

 and Flexible budget amount

y > standard qty]

input costs at standard costs

te per dlh < standard rate per dlh]

and Flexible budget amount

h > standard dlh]

input costs at standard costs

oh rate per dlh < standard voh rate per dlh]

 and Flexible budget amount

h > standard dlh]

d FOH / denominator activity level =

30,000 units

(POHR*SH for actual production)

geted FOH costs

h the $18,300 mentioned by the president.

rol during the year? Explain.

issues)

ake longer time to produce

uality, which don't clear quality control checks,
nce).
de if more raw materials are used than
usage), these low quantity purchases will not
l price variance.
uring the year.

used to manufacture the 30,000 units. There is no beginning/ ending inventories for the year.

ad costs follow:
 $210,000/35,000 hrs

production)

The total variance

To evaluate whetherof bonus
$18,300 agrees
should bewith
giventhe
tovariance
everyonementioned by the
for good cost president
control, we should look at the individual variances that co
manufacturing cost variance of $18,300

Material quantity variance and Labour efficiency variance are 6.67% and 3.57%, respectively, of the standard cost allowed. This
parameter set not
Bonus should by management for acceptable
be given to Production variances.
manager as he is responsible for quantity and efficiency variance. However, there is a
and seek clarifications.

The fact that

Favorable the total
volume variance
variance is within
indicates management's
that parametermore
company is producing of 3% may
than be due toThere
budgeted. the large favorable
is a need volume variance
to investigate of $
the reason
variance offset the large unfavorable quantity and efficiency variance, resulting in an acceptable net variance figure.
porduction volume. Production manager may produce more to have a favourable variance. If the company is unable to sell all p
manfactured, there will be a built up of inventory, which will lead to higher cost due to inventory holding

Volume variance has no significance for cost control. It is a result of the company operating at an activity level of 42,000 standa
than the denominator activity level (35,000) used to set predetermined overhead rates.
Labour
Hence, efficiency variance
volume variance andhas no significance
labour for cost control
efficiency variance should as
bewell. It is used
excluded to evaluate
in evaluating the efficiency
whether there is in the cost
good use of cost driv
control dur
When it is excluded, the total variance increased to $56,550 (3.68%), which is above the 3% parameter set by management for

Thus, we do not agree that bonuses should be given to everyone for good cost control during the year.
15-38
At its Sutter City plant, Yuba Machine Company manufactures nut shellers, which it sells to nut processors throughout the world
On December 1, 2019, Yuba began using a predetermined factory overhead application rate to determine manufacturing costs

Plant maximum (theoretical) capacity 100,000 DLHs

Variable factory overhead costs $3.00 per DLH
Fixed Factory
Fixed factory overhead costs: Application Rate
- Salaries $80,000 $0.8
- Depreciation and amortization $50,000 $0.5
- Other expenses $30,000 $0.3
Total fixed factory overhead $160,000

Based on these data, the predetermined factory overhead application rate was established at $4.60 per direct labor hour (DL
A variance report for the Sutter City plant for the six months ended May 31, 2020, follows. The plant incurred 40,000 DLHs, whi
Practical Capacity level % 50%
DLH Incurred 40000

Variance Report
Actual costs Applied*
Total Variable Factory OH $120,220 $120,000

Fixed factory OH:

- Salaries $39,000 $32,000
- Depreciation and amortization $25,000 $20,000
- Other expenses $15,300 $12,000
Total fixed factory overhead $79,300 $64,000
*Based on 40,000 direct labor hours (DLHs)

Yuba’s controller, Sid Thorpe, knows from the inventory records that one-quarter of this period’s applied fixed overhead cos
Based on this information, he has included $48,000 of fixed overhead (i.e.,three-quarters of the period’s applied fixed overhead
YUBA MACHINE COMPANY
Interim Income Statement
For Six Months Ended 31 May, 2020
Sales $625,000
COGS $380,000
Gross profit $245,000
Selling expense $44,000
Depreciation exp $58,000
Administrative exp $53,000
Operating income $90,000

1. Define the term maximum (theoretical) capacity, and explain why it might not be a satisfactory basis for determining
What other capacity levels can be used to set the fixed factory overhead allocation rate? Provide a short definition of e

Maximum (Theoretical) Capacity

Maximum (theoretical) capacity is the maximum level of activity or output based on available capacity if all of its equipment and
It assumed that Sutter city plant functions 24/7 without disruptions to yield the maximum possible output, i.e. 100% of plant cap
Hence, it might not be a satisfactory basis as it does not include any provision for interruptions in productions such as machine

Other Capacity Level

Practical capacity Theoretical capacity reduced by normal employee breaks, machine downtime for maintenance and othe
Budgeted capacity
utilization The expected level of activity or output for the upcoming period, usually a year.
Normal capacity The expected level of demand for the company's product projected over an intermediate-level number o

2. Prepare a revised variance report for Yuba Machine Company using practical capacity as the basis for determining t
overhead cost variance to the nearest whole dollar. Indicate whether each of the five overhead cost variances in the re

Practical Capacity is 80% of Theoretical capacity

Plant practical capacity 80,000 DLHs

Variable factory overhead costs $3.00 per DLH
Fixed factory overhead costs:
- Salaries $80,000
- Depreciation and amortization $50,000
- Other expenses $30,000
Total fixed factory overhead $160,000

DLH Incurred 40,000

Revised Variance Report

Actual costs Applied*
Total Variable Factory OH $120,220 $120,000

Fixed factory OH:

- Salaries $39,000 $40,000
- Depreciation and amortization $25,000 $25,000
- Other expenses $15,300 $15,000
Total fixed factory overhead $79,300 $80,000
*Based on 40,000 direct labor hours (DLHs)

Revised Fixed Overhead Application Rate = Budgeted Fixed Overhead ÷ Practical Capacity (DLHs)

3. What would Yuba’s reported (a) cost of goods sold (CGS), and (b) operating income be for the 6 months ending May
maximum capacity? Round each answer to the nearest whole dollar.
 YUBA MACHINE COMPANY
Interim Income Statement
For Six Months Ended 31 May, 2020
Sales $625,000
COGS $392,000 COGS = $380,000 - $48,000 + (3/4 x $80,00
Gross profit $233,000
Selling expense $44,000
Depreciation exp $58,000
Administrative exp $53,000
Operating income $78,000

4. What capacity level should companies use to determine the factory overhead application rate? Why?
Practical capacity
The use of practical capacity for establishing ABC rates yields relevant information regarding the existence and cost of unused
because using theoretical capacity will underestimate the amount of overhead cost to be budgeted,

Secondly, the use of practical capacity in the denominator is logically consistent with the numera-
tor in the fixed overhead rate calculation. That is, the numerator represents the costs of the
capacity supplied and the denominator represents, in practical terms, the amount of capacity
supplied.

Thirdly, relative to budgeted output, the use of practical capacity provides more uniform data
over time, which facilitates decision making on the part of management. (That is, managers do
not have to continually reevaluate decisions based on changing product-cost data over time.)

Fourth, and perhaps most important, the use of practical capacity means that cur-
rent customers and current production will not be burdened with the cost of unused (i.e., idle)
capacity, which would be the case if budgeted output were used and budgeted output is less
than practical capacity.
Practical capacity. When practical capacity is used to calculate the fixed overhead application rate, the cost of
unused capacity becomes visible to management through the amount and direction of the production volume variance
o nut processors throughout the world. Since its inception, the family-owned business has used actual factory overhead costs in costing fact
te to determine manufacturing costs on a more timely basis. The following information is from the 2019–2020 budget for the Sutter City pla

d at $4.60 per direct labor hour (DLH).

The plant incurred 40,000 DLHs, which represents one-half of the company’s practical capacity level.

nce Report
Variance
-$220 U

-$7,000 U
-$5,000 U
-$3,300 U
-$15,300 U

period’s applied fixed overhead costs remain in the Work-in-Process Inventory and Finished Goods Inventory accounts.
of the period’s applied fixed overhead) as part of the cost of goods sold in the following interim income statement:

satisfactory basis for determining the fixed factory overhead application rate.
 ate? Provide a short definition of each of these alternative capacity levels.

ble capacity if all of its equipment and operations performed continuously at their optimum efficiency.
ossible output, i.e. 100% of plant capacity, which is not feasible in reality
ions in productions such as machine break-down, machine downtime for repairs and maintenance, etc.

e downtime for maintenance and other "expected" loss of outputs. *practical capacity is usually used

ually a year.
d over an intermediate-level number of years into the future ie 3-5 years

acity as the basis for determining the fixed factory overhead application rate. Round each applied overhead cost and each
e overhead cost variances in the revised Variance Report is favorable (F) or unfavorable (U).

Fixed Factory Application Rate

$80,000 / 80,000 $1.00
$50,000 / 80,000 $0.63
$30,000 / 80,000 $0.38

Variance Report
Variance
-$220 U

$1,000 F
$0
-$300 U
$700 F

=$160,000/80,000 hrs = $2/DLH

me be for the 6 months ending May 31, 2020 if the fixed factory overhead rate is based on practical capacity rather than on
 YUBA MACHINE COMPANY
Assumption: The fixed
Interim MOHStatement
Income variance has been charged to COGS
For Six Months Ended 31 May, 2020
Sales $625,000
= $380,000 - $48,000 + (3/4 x $80,000) COGS $376,000 COGS = $380,000 - $48,000 + (3/4 x $8
Gross profit $249,000
Selling expense $44,000
Depreciation exp $58,000
Administrative exp $53,000
Operating income $94,000

lication rate? Why?

ng the existence and cost of unused capacity,

ion rate, the cost of

production volume variance
tory overhead costs in costing factory output.
2020 budget for the Sutter City plant:

entory accounts.
ical capacity is usually used

overhead cost and each

capacity rather than on

S = $380,000 - $48,000 + (3/4 x $80,000) - 15,300 + 700
16-53
TransPacific Airlines (TPA) budgeted 80 million passenger miles, or 5% of the total market for the year just complete
The budgeted average price was 52 cents per passenger mile. The operating data for the year show that TPA flew 6
The terrorist activity in the early part of the year in several countries in the region decreased the total miles flown by
There is no flexible-budget variance for all costs.

Required
1. In an effort to understand the operating results, you are asked to compute the following:

Budgeted Data
Budgeted passenger miles 80,000,000
Total market for the year just completed 5%
Contribution margin per mile $0.40
Budgeted average price per passenger mile $0.52

Operating (Actual) Data

Passenger miles flew 69,120,000
Average price per passenger mile $0.48

% Decrease in total miles due to terroism 10%

a.Selling price variance = (Actual selling price per mile - Budgeted selling per per mile) x Total miles
= ($0.48 - $0.52) x 69,120,000
= 2,764,800 Unfavourable [actual price < budgeted]

b.Sales volume variance = (Actual total miles x Budgeted CM/mile) - (Budgeted total miles x Budgeted CM/m
= (69,120,000 x $0.40) - (80,000,000 x $0.40)
= 4,352,000 Unfavourable [actual volume < budgeted]

Market size for the previous year 1,600,000,000 (units)

Actual market size (90%) 1,440,000,000 (units)

c.Market size variance = (Actual market size in units - Budgeted market size in units) x Budgeted market s
= (1,440,000,000 - 1,600,000,000) x 5% x $0.40
= 3,200,000 Unfavourable [actual market size < budgeted]

Budgeted Market share 5%

Actual market share 4.80%

d.Market share variance = (Actual market share - Budgeted market share) x Actual market size in units x We
= (4.8% - 5%) x 1,440,000,000 x $0.40
= 1,152,000 Unfavourable [actual market share < budgeted]
2. Explain the risks posed by the global economic environment for TPA, and suggest strategies for mitigatin

Risk 1: Fall in demand for travelling due to existing competitions

Strategy 1: TPA should focus on their unique value proposition to differentiate themselves ag
to build brand loyalty, or build a strong loyalty programme to incentivise customer

Risk 2: Increase in security issues (i.e terrorism)

Strategy 2: TPA can tighten checks and have stringent screening procedures to minimise cha

Risk 3: Rise in Oil

Fuel cost pricesfor a huge portion of expenses for aviation industry such as TP
account
It is estimated that just a $1 increase per barrel of oil can cost the global airline in
Strategy 3: TPA can use hedging strategy to cope with the rising fuel cost. TPA can enter into
Strategy 4: Purchase new fuel-efficient aircrafts and ensure aircrafts are well-maintained
Ensure that routing and scheduling of planes is optimised in the best way possibl

Risk 4: Foreign Exchange Risk

Strategy 5: TPA can use hedging strategy to cope with the foreign exchange risk. For examp

Risk 5: Political Disruptions

Political dispute within different countries which affects different airlines
e.g. india and pakistan war, airlines have to do diversions (ended up with extra 1
Strategy 6: TPA can set up a risk management committee to constantly monitor the political,
otal market for the year just completed, at a contribution margin of 40 cents per mile.
ata for the year show that TPA flew 69.12 million passenger miles with an average price of 48 cents per passenger mile.
n decreased the total miles flown by all airlines for the year by 10%.

ute the following:

selling per per mile) x Total miles

l price < budgeted]

(Budgeted total miles x Budgeted CM/mile)

l volume < budgeted]

arket size in units) x Budgeted market share x Weighted-average budgeted CM per mile

l market size < budgeted]

share) x Actual market size in units x Weighted-average budgeted CM per mile

l market share < budgeted]

nd suggest strategies for mitigating those risks.

sting competitions
roposition to differentiate themselves against their competition through quality service
yalty programme to incentivise customer to travel with TPA

nt screening procedures to minimise chances for terrorist activities

xpenses for aviation industry such as TPA.

barrel of oil can cost the global airline industry an additional $1 billion a year.
th the rising fuel cost. TPA can enter into a hedging contract whereby the price of fuel will be established at a fixed price
ensure aircrafts are well-maintained
nes is optimised in the best way possible so that there will be fewer flight cycles and better capacity planning.

th the foreign exchange risk. For example, the company can enter into a hedging contract whereby the company can sell/ buy foreign curre

which affects different airlines

to do diversions (ended up with extra 1 hour travelling time & waste more fuel)
mittee to constantly monitor the political, social and regulatory environment of countries so timely responses can be carried out to resolve an
ts per passenger mile.
 a fixed price

mpany can sell/ buy foreign currency at a fixed rate.

s can be carried out to resolve any issues that arose from such political disruptions.
16-55

Tall Pines Brewery (TPB) makes two specialty beers in its microbrewery: Golden Ale and Dark Ale.
Both beers sell for the same price per case in the U.S. market and in the export market. The latter market is primaril
the export product has slightly higher variable costs due to shipping and other distribution costs associated with the

Budgeted Wt
Budgeted Actual Avg CM
Sales unit (cases)
Domestic 22,000 22,350
Export 12,000 14,500
Total 34,000 36,850
Price per case
Domestic $88 $87
Export $90 $92
Variable cost per case
Domestic $62 $62
Export $68 $68
CM per case
Domestic $26 $25
Export $22 $24
Total CM
Domestic $572,000 $558,750
Export $264,000 $348,000 $24.5882

Industry Budget Industry Actual

Sales unit (cases)
Domestic 901,500 924,550
Export 635,400 645,750
Total 1,536,900 1,570,300

The budget was prepared with the expectation that the currency exchange rate would be $1.29 per euro.
The actual average exchange rate for the period reflected the falling dollar, at $1.42 per euro.
Required Round all calculations to 4 decimal places after the decimal point.

Budgeted Actual
Market Share
Domestic 2.4404% 2.4174%
Export 1.8886% 2.2455%

1. What is the market share variance?

 Actual Market Share = = 36,850 / (645,750 + 924,550) 2.3467%
Budgeted Market Share = = 34,000 / (901,500 + 635,400) 2.2122%
Total Market share variance = (Actual market share - Budgeted market share) x Total actual market size in units x
= (2.3467% - 2.2122%) x 1,570,300 x $24.5882
= $51,908.3956 Favourable

Alternative Note: When calculating the individual market (domestic / export) share variance, use individual budgeted cm/u
Domestic = (Actual Domestic market share - Budgeted Domestic market share) x Total actual D
= (2.4174% - 2.4404%) x 924,550 x $26
= $5,525.1803 Unfavourable

Export = (Actual Export market share - Budgeted Export market share) x Total actual Export
= (2.2455% - 1.8886%) x 645,750 x $22
= $50,699.7167 Favourable

Total Market share variance = (Actual - Budgeted Domestic market share) x Total domestic market size x Weighte
(Actual - Budgeted Export market share) x Total export market size x Weighted avg
(2.4174%-2.4404%) x 924,550 x $24.5882 + (2.2455%-1.8886%) x 645,750 x $24.
=
= $51,439.1450 Favourable

2. What is the market size variance?

Total Market size variance = (Actual market size in units - Budgeted market size in units) x Budgeted market sh
= (1,570,300 - 1,536,900) x 2.2122% x $24.5882
= $18,167.9744 Favourable
Alternative
Domestic = (Actual Domestic market size in units - Budgeted Domestic market size in units) x B
= (924,550 - 901,500) x 2.4404% x $26
= $14,625.1803 Favourable

Export = (Actual Export market size in units - Budgeted Export market size in units) x Budge
= (645,750 - 635,400) x 1.89% x $22
= $4,300.2833 Favourable

Total Market size variance = (Actual Domestic - Budgeted Domestic market size in units) x Budgeted Domestic
(Actual Export - Budgeted Export market size in units) x Budgeted Export market s
= (924,550 - 901,500) x 2.4404% x $24.5882 + (645,750 - 635,400) x 1.89% x $24.5
= $18,637.2250 Favourable

3. What is the selling price variance and sales volume variance?

Selling price variance = (Actual selling price per case - Budgeted selling per per case) x Total cases sold
 = (87-88) x 22,350 + (92-90) x 14,500
= $6,650 Favourable

Domestic = (Actual selling price per case - Budgeted selling per per case) x Total cases sold
= (87-88)*22,350
= $22,350 Unfavourable

Export = (Actual selling price per case - Budgeted selling per per case) x Total cases sold
= (92-90)*14,500
= $29,000 Favourable

Sales volume variance = (Actual cases sold - Budgeted cases sold) x Budgeted CM per case
= (22,350-22,000) x 26 + (14,500-12,000) x 22
= $64,100 Favourable

Domestic = (Actual cases sold - Budgeted cases sold) x Budgeted CM per case
= (22,350-22,000) x 26
= $9,100 Favourable

Export = (Actual cases sold - Budgeted cases sold) x Budgeted CM per case
= (14,500-12,000)*22
= $55,000 Favourable

4. What is the sales mix variance and sales quantity variance?

Units sold Actual Mix Budgeted units

Domestic 22,350 60.6513% 22,000
Export 14,500 39.3487% 12,000
Total 36,850 100% 34,000

Sales quantity variance = Market Size Variance + Market Share Variance

= $18,168.005 + $51,908.4701
= $70,076.3700 Favourable

Domestic = (Total units sold in both market - Budgeted units of both market) x Budgeted Dome
= (36,850 - 34,000) x 64.7059% x $26
= $47,947.0588 Favourable

Export = (Total units sold in both market - Budgeted units of both market) x Budgeted Expor
= (36,850 - 34,000) x 35.2941% x $22
= $22,129.4118 Favourable

Sales mix variance = Sales volume variance - sales quantity variance

 = (64,100 - 70,076.4706)
= $5,976.3700 Unfavourable

Domestic = (Actual Domestic sales mix - Budgeted Domestic sales mix) x Total units sold in bo
= (60.6513%-64.7059%) x 36,850 x 26
= $38,847.0588 Unfavourable

Export = (Actual Export sales mix - Budgeted Export sales mix) x Total units sold in both ma
= (39.3487%-35.2941%) x 36,850 x 22
= $32,870.5882 Favourable

5. Explain possible reasons for these variances, including a consideration of the effect of the change in the

1. Both domestic and export market size variance are favourable, but market share variance is favourable only for exp
Reason:
- The increase in both domestic and export market size could be due to an increase in global demand for beer. However, increa
since everyone else is selling more. Despite the increase in market size, the domestic market share still decreased, indicating th
- Generally, TPB is doing better in the export market due to the the weakening US Dollar which makes TPB's exports cheaper in
thus increasing the demand for exports (increasing export market size and market share).
- Currently, TPB can leverage on the weakening US Dollar. However, if US Dollar appreciates or Euros depreciates, it will great
since they do not have a huge market share in the domestic market that they can rely on to cushion the fall in demand for expo

2. Domestic selling price variance is unfavorable while export selling price variance is favorable.
Both domestic sales volume variance and export sales volume variance are favourable but export sales volume increa
Reason:
- Increase in export selling price and export sales volume can be attributed to the weakening US Dollar, since it is cheaper for E
- Unfavourable domestic selling price variance could due to increased competition in the beer market within the US, causing TP

3. Domestic sales mix variance is unfavorable while export sales mix variance is favorable. Domestic sales mix decrea
Reason:
- Export sales mix is favourable due to the weakening of the US Dollar that resulted in a huge increase in units sold for exports
- TPB should focus its efforts on improving sales mix domestically because the contribution margin is higher than exporting to E

4. Favourable sales quantity variance where TPB sold 2,850 more cases than budgeted
Reason:
- This could be due to increased global demand for beer, or an increase in popularity of TPB's beer due to effective marketing.

*Analysis by domestic and export market

Domestic market, market size increase but market share drop, they are forced to reduce selling price.
Market shares are dropping. The decrease in sales volume cannot offset the selling price.
Shift of sales to exports -> looking at cm/unit results in shift to lower cm/unit.
They are not holding their fort in their own domestic market.
Export risks: forex risks, less control of the market.
e.g. Singapore cannot sell beer after 10.30pm. Overseas countries can implement such rules anytime to affect beer industry
Competition within domestic market is likely to be high
n Ale and Dark Ale.
market. The latter market is primarily European countries. Both beers also have the same variable production costs, though
istribution costs associated with the export beers. The price, cost, and market information for the two beers are shown below:

=(572k+264k)/34k

would be $1.29 per euro.

1.42 per euro.
 TPB Actual Sales Cases / Industry Actual Sales Cases
TPB Budgeted Sales Cases / Industry Budgeted Sales Cases
are) x Total actual market size in units x Weighted-average budgeted CM per case

e variance, use individual budgeted cm/unit

Domestic market share) x Total actual Domestic market size in units x Domestic budgeted CM per case

port market share) x Total actual Export market size in units x Export budgeted CM per case

(individual CM is used for each case is due to the difference in market base)

) x Total domestic market size x Weighted avg budgeted CM per case +

Total export market size x Weighted avg budgeted CM per case
+ (2.2455%-1.8886%) x 645,750 x $24.5882

ket size in units) x Budgeted market share x Weighted-average budgeted CM per cases

geted Domestic market size in units) x Budgeted Domestic market share x Domestic budgeted CM per case

ted Export market size in units) x Budgeted Export market share x Export budgeted CM per case

(individual CM is used for each case is due to the difference in market base)

rket size in units) x Budgeted Domestic market share x Weighted-average budgeted CM per case +
ze in units) x Budgeted Export market share x Weighted-average CM per case
+ (645,750 - 635,400) x 1.89% x $24.5882

elling per per case) x Total cases sold

elling per per case) x Total cases sold

elling per per case) x Total cases sold

x Budgeted CM per case

x Budgeted CM per case

x Budgeted CM per case

Budgeted mix
64.7059%
35.2941%
100%

units of both market) x Budgeted Domestic Sales mix x Budgeted Domestic CM/unit

units of both market) x Budgeted Export Sales mix x Budgeted Export CM/unit
mestic sales mix) x Total units sold in both markets x Budgeted Domestic CM/unit

sales mix) x Total units sold in both markets x Budgeted Export CM/unit

of the effect of the change in the currency exchange rate for the dollar and the euro.

e variance is favourable only for export while unfavourable for domestic sales.

lobal demand for beer. However, increase in market size does not mean increase in market share
arket share still decreased, indicating that it is not doing well in the domestic market.
r which makes TPB's exports cheaper in Euros,

eciates or Euros depreciates, it will greatly affect TPB's export revenue

n to cushion the fall in demand for exports.

ce is favorable.
urable but export sales volume increased way more than domestic sales volume.

ening US Dollar, since it is cheaper for European countries to buy TPB's beer with Euros (increase purchasing power).
e beer market within the US, causing TPB to reduce the selling price.

avorable. Domestic sales mix decreased by 4.0546%

huge increase in units sold for exports as compared to domestic market.

tion margin is higher than exporting to European countries.

TPB's beer due to effective marketing.

e selling price.
rules anytime to affect beer industry
e production costs, though
wo beers are shown below:
*Why do we look at the markets separately? they are totally different markets. It will hinder our analysis. Looking at individual m
2 types of different beers targetting one market ->
analysis. Looking at individual market size and share helps us to analyse the 2 separate markets.
 1P
7P E R I O D
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Across
1. Sales volume = (Actual units sold - ________) x Budgeted CM/Unit
2. SH: Standard hours allowed for ______ production
3. _________ overhead
4. _________ variance can be further partitioned into a market share variance and a market size variance
5. when _______ variance in journal entries, it means favourable and lowers COGS when close off
6. Production volume variance has not significance on cost ________
7. Production volume variance results from the inability to operate at the planned activity level for the _________
8. Sales volume variance comprises of sales ______ variance and sales mix variance
 7M
A
R
K
E
I T Y

I N G

Down
1. FOH Variance = Spending variance + _______ volume variance
2. ______ variance: Resutls from spending more or less than expected for fixed overhead items
3. _______ variance : does not reflect overhead control
4. Spending variance: actual _____ x (Actual rate - standard rate)
5. ___________ capacity: maximum level of activity or output based on 100% plant capacity
6. Production-volume variance: Difference between fixed overhead ____ and budgeted fixed overhead
7. Sales qty variance comprises of ______ size and share variance
8. Have a preference for mangoes
ed overhead
Across
6. _________ variance can be further partitioned into a
8. Production volume variance results from the inability t
9. when _______ variance in journal entries, it means fa
10. Sales volume = (Actual units sold - ________) x Bud
14. Production volume variance has not significance on
15. ______ variance: Results from spending more or les
16. FOH Variance = Spending variance + _______ volum

Down
1. Have a preference for mangoes
2. Production-volume variance: Difference between fixed
3. _________ overhead
4. Sales volume variance comprises of sales ______ va
5. Sales qty variance comprises of ______ size and sha
7. ___________ capacity: maximum level of activity or o
11. _______ variance : does not reflect overhead contro
12. SH: Standard hours allowed for ______ production
13. Spending variance: actual _____ x (Actual rate - sta
can be further partitioned into a market share variance and a market size variance
ariance results from the inability to operate at the planned activity level for the _________
nce in journal entries, it means favourable and lowers COGS when close off
ual units sold - ________) x Budgeted CM/Unit
variance has not significance on cost ________
esults from spending more or less than expected for fixed overhead items
ending variance + _______ volume variance

ariance: Difference between fixed overhead ____ and budgeted fixed overhead

ce comprises of sales ______ variance and sales mix variance

omprises of ______ size and share variance
ty: maximum level of activity or output based on 100% plant capacity
does not reflect overhead control
allowed for ______ production
actual _____ x (Actual rate - standard rate)