REVIEW PROBLEM 1: VARIANCE ANALYSIS USING A FLEXIBLE BUDGET

Harrald's Fish House is a family-owned restaurant that specializes in Scandinavian-style seafood. Data concerning
the restaurant's monthly revenues and costs appear below (q refers to the number of meals served):

Required:
1. Prepare the restaurant's planning budget for April assuming that 1,800 meals are served.
2. Assume that 1,700 meals were actually served in April. Prepare a flexible budget for this level of activity.
3. The actual results for April appear below. Compute the revenue and spending variances for the restaurant for April.

Solution to Review Problem

1. The planning budget for April appears below:

2. The flexible budget for April appears below:

3. The revenue and spending variances for April appear below:

REVIEW PROBLEM 2: STANDARD COSTS

Xavier Company produces a single product. Variable manufacturing overhead is applied to products on the basis of
direct labor-hours. The standard costs for one unit of product are as follows:

During June, 2,000 units were produced. The costs associated with June's operations were as follows:

Required:
Compute the direct materials, direct labor, and variable manufacturing overhead variances.
Solution to Review Problem
Direct Materials Variances

 
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Direct Labor Variances

Variable Manufacturing Overhead Variances

FOUNDATIONAL 15
Preble Company manufactures one product. Its variable manufacturing overhead is applied to production based on
direct labor-hours and its standard cost card per unit is as follows:

The company also established the following cost formulas for its selling expenses:

The planning budget for March was based on producing and selling 25,000 units. However, during March the
company actually produced and sold 30,000 units and incurred the following costs:
a. Purchased 160,000 pounds of raw materials at a cost of $7.50 per pound. All of this material was used in
production.
b. Direct-laborers worked 55,000 hours at a rate of $15.00 per hour.

c. Total variable manufacturing overhead for the month was $280,500.

d. Total advertising, sales salaries and commissions, and shipping expenses were $210,000, $455,000, and
$115,000, respectively.

Required:

1. What raw materials cost would be included in the company's flexible budget for March?
Standard quantity used 5 lbs
* Act output 30,000 units
* Standard cost $8
$1,200,000
2. What is the materials quantity variance for March?
Standard Qty used  Qty used 160,000 lbs
*Act output *Act input
*Standard cost *Standard cost $8
$1,200,000 $1,280,000
$80,000 U
3. What is the materials price variance for March?
Price Variance: Standard cost – Actual cost * Actual output ----- when amounts purchased are equal to amounts
 used.
($8 – 7.50) * 160000 = $80,000 F
4. If Preble had purchased 170,000 pounds of materials at $7.50 per pound and used 160,000 pounds in
production, what would be the materials quantity variance for March?
Same as 2. $80,000 U. Because efficiency is computed on production amounts.
5. If Preble had purchased 170,000 pounds of materials at $7.50 per pound and used 160,000 pounds in
production, what would be the materials price variance for March?
$85,000 F because price variance is calculated on purchases.
($8 – 7.50) * 170000 = $85,000 F
6. What direct labor cost would be included in the company's flexible budget for March?
Standard quantity used 2 h
* Act output 30,000 units
* Standard cost $14
$840,000

7. What is the direct labor efficiency variance for March?

Actual hours 55,000 Standard rate $14 = $770,000
Efficiency variance $70,000 F
8. What is the direct labor rate variance for March?
($15-$14) * 55,000 hours = $55,000 F
9. What variable manufacturing overhead cost would be included in the company's flexible budget for March?
2 h * 30,000 units * standard rate $5 = $300,000
10. What is the variable overhead efficiency variance for March?
Actual hours 55,000 * standard rate $5 = $275,000
300,000 – 275,000 = $25000 F
11. What is the variable overhead rate variance for March?
($5.10-5)*55,000=$5,500 U
12. What amounts of advertising, sales salaries and commissions, and shipping expenses would be included in
the company's flexible budget for March?
Fixed Advertising $200,000
Fix Sales Sal & Comm. $100,000
Variable exp. Sales 30,000 *$12 360,000
Shipping * $3 90,000
$750,000
13. What is the spending variance related to advertising?
$200,000 - 210,000 = $10,000 U
14. What is the spending variance related to sales salaries and commissions?
Fix $100,000 + Var $360,000 - $455,000 = $5,000 F

15. What is the spending variance related to shipping expenses?

$90,000 – $115,000 = $25,000 U

EXERCISE 8–3     Prepare a Flexible Budget with More Than One Cost Driver [LO3]

Icicle Bay Tours operates day tours of coastal glaciers in Alaska on its tour boat the Emerald
Glacier. Management has identified two cost drivers—the number of cruises and the number of
passengers—that it uses in its budgeting and performance reports. The company publishes a
schedule of day cruises that it may supplement with special sailings if there is sufficient
demand. Up to 80 passengers can be accommodated on the tour boat. Data concerning the
company's cost formulas appear below:
Budgeted passengers = 3,400
For example, vessel operating costs should be $6,800 per month plus $475.00 per cruise plus
$3.50 per passenger. The company's sales should average $28.00 per passenger. The
company's planning budget for August is based on 58 cruises and 3,200 passengers.

Required:
Prepare the company's planning budget for August.

Exercise 8-3 (15 minutes)

Icicle Bay Tours Company name
Planning Budget Report title
For the Month Ended August 31 Date

Budgeted cruises (q1).................................................................................. 58

Budgeted passengers (q2)............................................................................ 3,200
Revenue ($28.00q2)..................................................................................... $89,600
Expenses:
Vessel operating costs ($6,800 + $475.00q1 +$3.50q2).............................. 45,550
Advertising ($2,700)................................................................................. 2,700
Administrative costs ($5,800 + $36.00q 1 + $1.80q2)................................... 13,648
Insurance ($3,600)...................................................................................    3,600
Total expense..............................................................................................  65,498
Net operating income.................................................................................. $24,102

EXERCISE 8–4     Material Variances [LO4]

Harmon Household Products, Inc., manufactures a number of consumer items for general
household use. One of these products, a chopping board, requires an expensive hardwood.
During a recent month, the company manufactured 4,000 chopping boards using 11,000 board
feet of hardwood. The hardwood cost the company $18,700.
The company's standards for one chopping board are 2.5 board feet of hardwood, at a cost of
$1.80 per board foot.

Required:
1. According to the standards, what cost for wood should have been incurred to make 4,000
chopping blocks? How much greater or less is this than the cost that was incurred?
2. Break down the difference computed in (1) above into a materials quantity variance and a
materials price variance.
1. Number of chopping blocks .................................. 4,000
Number of board feet per chopping block ............. × 2.5
Standard board feet allowed ................................ 10,000
Standard cost per board foot ............................... × $1.80
Total standard cost .............................................. $18,000
Actual cost incurred ............................................. $18,700
Standard cost above ............................................ 18,000
Spending variance—unfavorable ........................... $ 700

2.
Standard Quantity Allowed Actual Quantity of Actual Quantity of
for Actual Output, Input, Input,
at Standard Price at Standard Price at Actual Price
(SQ × SP) (AQ × SP) (AQ × AP)
10,000 board feet × 11,000 board feet ×
$1.80 per board foot $1.80 per board foot
= $18,000 = $19,800 $18,700
Materials quantity Materials price
variance = $1,800 U variance = $1,100 F
Spending variance = $700 U

Alternatively, the variances can be computed using the formulas:

Materials quantity variance = SP (AQ – SQ)
= $1.80 per board foot (11,000 board feet – 10,000 board feet)
= $1,800 U
Materials price variance = AQ (AP – SP)
= 11,000 board feet ($1.70 per board foot* – $1.80 per board foot)
= $1,100 F
*$18,700 ÷ 11,000 board feet = $1.70 per board foot.
EXERCISE 8–13     Material and Labor Variances [LO4, LO5]

Sonne Company produces a perfume called Whim. The direct materials and direct labor
standards for one bottle of Whim are given below:

During the most recent month, the following activity was recorded:
a. Twenty thousand ounces of material were purchased at a cost of $2.40 per ounce.
b. All of the material was used to produce 2,500 bottles of Whim.
c. Nine hundred hours of direct labor time were recorded at a total labor cost of $10,800.

Required:
1. Compute the direct materials quantity and price variances for the month.
2. Compute the direct labor efficiency and rate variances for the month.

1.
Standard Quantity Allowed
for Actual Output, Actual Quantity of Input, Actual Quantity of Input,
at Standard Price at Standard Price at Actual Price
(SQ × SP) (AQ × SP) (AQ × AP)
18,000 ounces* × 20,000 ounces × 20,000 ounces ×
$2.50 per ounce $2.50 per ounce $2.40 per ounce
= $45,000 = $50,000 = $48,000

Materials quantity variance = Materials price variance =

$5,000 U $2,000 F
Spending variance = $3,000 U

*2,500 units × 7.2 ounces per unit = 18,000 ounces

 2. Standard Hours Allowed
for Actual Output, Actual Hours of Input, Actual Hours of Input,
at Standard Rate at Standard Rate at Actual Rate
(SH × SR) (AH × SR) (AH × AR)
1,000 hours* × 900 hours ×
$10.00 per hour $10.00 per hour
= $10,000 = $9,000 $10,800

Labor efficiency variance Labor rate variance

= $1,000 F = $1,800 U
Spending variance = $800 U

*2,500 units × 0.4 hour per unit = 1,000 hours

EXERCISE 8–17     Material and Labor Variances [LO4, LO5]

Topper Toys has developed a new toy called the Brainbuster. The company has a
standard cost system to help control costs and has established the following
standards for the Brainbuster toy:

During August, the company

produced 5,000 Brainbuster toys. Production data on the toy for August follow:

Standard direct labor-hours per toy = 0.75 hours

Required:

1. Compute the following variances for August:

1. a. Direct materials quantity and price variances.

2. b. Direct labor efficiency and rate variances.

2. Prepare a brief explanation of the possible causes of each variance.

Exercise 8-17
1. a. Notice in the solution below that the materials price variance is computed on the entire
amount of materials purchased, whereas the materials quantity variance is computed
only on the amount of materials used in production.

Standard Quantity Allowed for Actual Quantity Actual Quantity

Actual Output, of Input, of Input,
at Standard Price at Standard Price at Actual Price
(SQ × SP) (AQ × SP) (AQ × AP)
40,000 diodes* × 50,000** diodes × 70,000 diodes ×
$0.30 per diode $0.30 per diode $0.28 per diode
= $12,000 = $15,000 = $19,600
Materials quantity variance =
$3,000 U
70,000 diodes ×
$0.30 per diode
= $21,000
Materials price variance
= $1,400 F
*5,000 toys × 8 diodes per toy = 40,000 diodes
**Purchased 70,000 diodes, 20,000 in ending inventory
b. Direct labor variances:
Standard Hours Allowed Actual Hours of Input,
for Actual Output, Actual Hours of Input,
at Standard Rate at Standard Rate at Actual Rate
(SH × SR) (AH × SR) (AH × AR)
3,000 hours* × 3,200 hours ×
$14.00 per hour $14.00 per hour
= $42,000 = $44,800 $48,000
Labor efficiency variance Labor rate variance
= $2,800 U = $3,200 U
Spending variance = $6,000 U
*5,000 toys × 0.6 hours per toy = 3,000 hours

PROBLEM 8–23A Flexible Budgets and Spending Variances [LO1, LO2]

You have just been hired by SecuriDoor Corporation, the manufacturer of a revolutionary new garage door opening
device. The president has asked that you review the company's costing system and "do what you can to help us get
better control of our manufacturing overhead costs." You find that the company has never used a flexible budget, and
you suggest that preparing such a budget would be an excellent first step in overhead planning and control.
After much effort and analysis, you determined the following cost formulas and gathered the following actual cost
data for April:

During April, the company worked 18,000 machine-hours and produced 12,000 units. The company had originally
planned to work 20,000 machine-hours during April.
Required:
1. Prepare a flexible budget for April.
2. Prepare a report showing the spending variances for April. Explain what these variances mean.

Scarfo Hotel bases its budgets on guest-days. The hotel’s static budget for December appears below:

Budgeted number of guest-days......................... 2,100

Budgeted variable overhead costs:
Supplies (@$1.80 per guest-day).................... $ 3,780
Laundry (@$2.00 per guest-day)....................   4,200
Total variable overhead cost...............................   7,980
Budgeted fixed overhead costs:
 Wages and salaries.......................................... 5,040
Occupancy costs.............................................   4,620
Total fixed overhead cost...................................   9,660
Total budgeted overhead cost............................. $17,640

The total overhead cost at an activity level of 2,900 guest-days per month should be:
A) $20,680
B) $17,640
C) $24,360
D) $20,890
Answer:
Budgeted number of guest-days......................... 2,900
Budgeted variable overhead costs:
Supplies (@$1.80 per guest-day).................... $ 5,220
Laundry (@$2.00 per guest-day).................... 5,800
Total variable overhead cost............................... 11,020
Budgeted fixed overhead costs:
Wages and salaries.......................................... 5,040
Occupancy costs............................................. 4,620
Total fixed overhead cost................................... 9,660
Total budgeted overhead cost............................. $20,680

Farver Air uses two measures of activity, flights and passengers, in the cost formulas in its flexible
budgets. The cost formula for plane operating costs is $44,420 per month plus $2,008 per flight plus $1
per passenger. The company expected its activity in May to be 80 flights and 281 passengers, but the
actual activity was 81 flights and 277 passengers. The actual cost for plane operating costs in May was
$199,650. The spending variance for plane operating costs in May would be closest to:
A) $5,691 F
B) $7,695 U
C) $7,695 F
D) $5,691 U
Answer
Flexible budget ($44,420 + $2,008 × 81 + $1 × 277)....................... $207,345
Actual results.................................................................................... 199,650
Spending variance............................................................................ $  7,695
Because the actual expense is less than the flexible budget, the variance is favorable (F).