This presentation includes:

Exercises 7-17, 7-18

Problem 7-35

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Exercise 7-17

Flexible budget Connor Company’s budgeted

prices for direct materials, direct manufacturing
labor, and direct marketing (distribution) labor per
attaché case are $40, $8, and $12, respectively.

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The president is pleased with the following
performance report:

Actual Costs Static Budget Variance

Direct materials $364,000 $400,000 $36,000 F
Direct manufacturing labor 78,000 80,000 2,000 F
Direct marketing
(distribution) labor 110,000 120,000 10,000
F

Actual output was 8,800 attaché cases. Assume all three direct-cost
items above are variable costs.

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Question:

Is the president’s pleasure justified?

Prepare a revised performance report that uses a

flexible budget and a static budget.

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The existing performance report is a Level 1
analysis, based on a static budget.

It makes no adjustment for changes in output

levels.

The budgeted output level is 10,000 units

(direct materials of $400,000 in the static budget ÷
budgeted direct materials cost per attaché case of
$40.)

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Level 2 analysis that presents a flexible-
budget variance and a sales-volume
variance of each direct cost category

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The Level 1 analysis shows total direct costs have a
$48,000 favorable variance. However, the Level 2 analysis
reveals that this favorable variance is due to the reduction
in output of 1,200 units from the budgeted 10,000 units.

Each direct cost category has an actual unit variable cost

that exceeds its budgeted unit cost:

Therefore, the Presidents pleasure is not really

justified based on these results.

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Analysis of price and efficiency variances
for each cost category could assist in
further the identifying causes of these
more aggregated (Level 2) variances.

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Exercise 7-18

Flexible-budget preparation and analysis

Bank Management Printers, Inc., produces
luxury checkbooks with three checks and
stubs per page. Each checkbook is designed
for an individual customer and is ordered
through the customer’s bank.

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The company’s operating budget for
September 2012 included these data:

Number of checkbooks 15,000

Selling price per book $ 20
Variable cost per book $8
Fixed costs for the month $145,000

The actual results for September 2012 were:

Number of checkbooks 12,000

Selling price per book $ 21
Variable cost per book $7
Fixed costs for the month $150,000
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1. Prepare a static-budget-based variance
analysis of the September performance

Variance Analysis for Bank Management Printers for

September 2012

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2. Prepare a flexible-budget-based variance
analysis of the September performance
Reminder: the sales volume variance is the difference between actual and
budged output times budgeted contribution margin or (3,000 x 12)

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3. Why might Bank Management find the
flexible-budget-based variance analysis
more informative than the static-budget-
based variance analysis? Explain youR
answer.
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.

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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).

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Problem 7-35

Direct manufacturing labor and direct materials

variances, missing data
Morro Bay Surfboards manufactures fiberglass
surfboards. The standard cost of direct materials
and direct manufacturing labor is $225 per board.
This includes 30 pounds of direct materials, at the
budgeted price of $3 per pound, and 9 hours of
direct manufacturing labor, at the budgeted rate of
$15 per hour.

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Following are additional data for the month
of July:
Units completed 5,500 units
Direct material purchases 190,000 pounds
Cost of direct material purchases $579,500
Actual direct manufacturing labor-hours 49,000
Actual direct-labor cost $739,900
Direct materials efficiency variance $ $1,500 F

There were no beginning inventories.

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1. Compute direct manufacturing labor
variances for July.

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2. Compute the actual pounds of direct
materials used in production in July.
Budgeted pounds allowed for the output achieved:
5,500 × 30 = 165,000 pounds
Actual pounds of direct materials used:
165,000 - 500 = 164,500 pounds

Unfavorable direct materials efficiency variance of $1,500

indicates that fewer pounds of direct materials were
actually used than the budgeted quantity allowed for actual
output.
$1,500 efficiency variance
$3 per pound budgeted price

= 500 pounds
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3. Calculate the actual price per pound of
direct materials purchased.

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4. Calculate the direct materials price
variance.

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 7-21
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