Managerial Accounting Chapter 11

CHAPTER 11: CASE STUDY 11-55

Comprehensive Variance Analysis
Used to Explain Operational Results
Rene Morel
Embry-Riddle Aeronautical University Online

MBAA 517
Instructor: Dr. Ana Machuca

Managerial Accounting Chapter 11

Aunt Mollys Old Fashioned Cookies bakes cookies for retail stores. The companys best-selling
cookie is chocolate nut supreme, which is marketed as a gourmet cookie and regularly sells for
$8.00 per pound. The standard cost per pound of chocolate nut supreme, based on Aunt
Mollys normal monthly production of 400,000 pounds, is as follows:

Cost Item

Quantity

Standard
Unit Cost

Direct Materials:
Cookie Mix
Milk Chocolate
Almonds

10 oz.
5 oz.
1 oz.

0.02 per oz.

0.15 per oz.
0.50 per oz.

$
$
$
$

0.20
0.75
0.50
1.45

Mixing

1 min

14.40 per hr.

0.24

Baking

2 min

18.00 per hr.

$
$

0.60
0.84

Variable Overhead
3 min
Total standard cost per pound

32.40 per hr.

$
$

1.62
3.91

Total Cost

Direct labor

Aunt Mollys management accountant, Karen Blair, prepares monthly budget reports based on
these standard costs. Aprils contribution report, which compares budgeted and actual
performance, is shown in the following schedule.
Contribution Report for April

Units (in pounds)

Revenue
Direct material
Direct labor
Variable overhead
Total variable costs
Contribution margin

Static
Budget

Actual

Variance

400,000

450,000

50,000

$ 3,200,000.00
$ 580,000.00
$ 336,000.00
$ 648,000.00
$ 1,564,000.00
$ 1,636,000.00

$ 3,555,000.00
$ 865,000.00
$ 348,000.00
$ 750,000.00
$ 1,963,000.00
$ 1,592,000.00

$
$
$
$
$
$

355,000.00
285,000.00
12,000.00
102,000.00
399,000.00
44,000.00

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Justine Madison, president of the company, is disappointed with the results. Despite a sizable
increase in the number of cookies sold, the products expected contribution to the overall
profitability of the firm decreased. Madison has asked Blair to identify the reason why the
contribution margin decreased. Blair has gathered the following information to help in her
analysis of the decrease.
Usage Report for February
Cost Item
Direct Materials:
Cookie Mix
Milk Chocolate
Almonds
Direct Labor:
Mixing
Baking
Variable Overhead
Total Variable Costs

Quantity

4,650,000
2,660,000
480,000
450,000
800,000

Actual Cost

$
$
$

93,000.00
532,000.00
240,000.00

$ 108,000.00
$ 240,000.00
$ 750,000.00
$ 1,963,000.00

Required:
1. Prepare a new contribution report for April in which:

The static budget column in the contribution report is replaced with a flexible budget
column.
The variances in the contribution report are recomputed as the difference between the
flexible budget and actual columns.

First, I performed a Contribution report for 400,000 and then for 450,000 pounds.

Managerial Accounting Chapter 11

April Contribution Report

Quantity

Standard

Standard Cost

Actual

Actual
Cost

Actual Total
Cost

Revenue

400,000

$8.00

$3,200,000.00

450,000

$7.90

$3,555,000.00

Units (in pounds)

400,000

Direct Materials:
Cookie Mix
Milk Chocolate
Almonds

4,000,000
2,000,000
400,000

$0.02
$0.15
$0.50

$80,000.00
$300,000.00
$200,000.00
$580,000.00

4,650,000
2,660,000
480,000

$0.02
$0.20
$0.50

$93,000.00
$532,000.00
$240,000.00
$865,000.00

Direct labor
Mixing
Baking

400,000
800,000

$0.24
$0.30

$96,000.00
$240,000.00
$336,000.00

450,000
800,000

$0.24
$0.30

$108,000.00
$240,000.00
$348,000.00

Variable
Overhead

400,000

$1.62

$648,000.00
$648,000.00
$1,564,000.00

450000

$1.67

$750,000.00
$750,000.00
$1,963,000.00

Contribution
Margin

450,000

$1,636,000.00

$1,592,000.00

Managerial Accounting Chapter 11

April Contribution Report

Quantity

Standard

Standard Cost

Actual

Actual
Cost

Actual Total
Cost

Revenue

450,000

$8.00

$3,600,000.00

450,000

$7.90

$3,555,000.00

Units (in pounds)

450,000

Direct Materials:
Cookie Mix
Milk Chocolate
Almonds

4,500,000
2,250,000
450,000

$0.02
$0.15
$0.50

$90,000.00
$337,500.00
$225,000.00
$652,500.00

4,650,000
2,660,000
480,000

$0.02
$0.20
$0.50

$93,000.00
$532,000.00
$240,000.00
$865,000.00

Direct labor
Mixing
Baking

450,000
900,000

$0.24
$0.30

$108,000.00
$270,000.00
$378,000.00

450,000
800,000

$0.24
$0.30

$108,000.00
$240,000.00
$348,000.00

Variable
Overhead

450,000

$1.62

$729,000.00
$729,000.00
$1,759,500.00

450000

$1.67

$750,000.00
$750,000.00
$1,963,000.00

Contribution Margin

450,000

$1,840,500.00

$1,592,000.00

2. What is the total contribution margin in the flexible budget column of the new report
prepared for requirement (1)?
For 400,000 pounds: $1,636,000.00
For 450,000 pounds: $1,840,500.00
3. Explain (i.e., interpret) the meaning of the total contribution margin in the flexible
budget column of the new report prepared for requirement (1).
The use of a Flexible budget is very good in means of representing everything as a standard
cost. It is a measure of controlling variable costs and measuring towards a standard. If the
results for the actual budget where as the flexible budget, the contribution margin should have
been more.

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4. What is the total variance between the total variance between the flexible budget
contribution margin and the actual contribution margin in the new report prepared for
requirement (1)? Explain this total contribution margin variance by computing the
following variances. (Assume that all materials are used in the month of purchase.)
a. Direct-material price variance.
Direct materials:
Cookie Mix: Flexible=$0.02, Actual=$0.02, 4,650,000 x ($0.00)=$0.00
Milk Chocolate: Flexible=$0.15, Actual=$0.20, 2,660,000 x ($0.05) = $133,000 U
Almonds: Flexible=$0.50, Actual=$0.50, 480,000 x ($0.00)=$0.00
Total: $133,000.00 U
b. Direct-material quantity variance.
Direct Materials:
Cookie Mix
Milk Chocolate
Almonds

4,500,000
2,250,000
450,000

$0.02
$0.15
$0.50

$90,000.00
$337,500.00
$225,000.00
$652,500.00

4,650,000
2,660,000
480,000

$0.02
$0.20
$0.50

$93,000.00
$532,000.00
$240,000.00
$865,000.00

150,000 x ($0.02) = $3,000.00

410,000 x ($0.15) = $61,500.00
30,000 x ($0.50) = $15,000.00
Total variance: $79,500.00
Or, $865,000-$652,500.00=$79,500.00
c. Direct-labor rate variance.
The direct-labor rate is equal to zero.
d. Direct-labor efficiency variance.
Direct labor
Mixing
Baking

450,000
900,000

$0.24
$0.30

$108,000.00
$270,000.00
$378,000.00

$378,000-$348,000=$30,000.00 Favorable

450,000
800,000

$0.24
$0.30

$108,000.00
$240,000.00
$348,000.00

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e. Variable-overhead spending variance.

$750,000-($1,250,000/60x$32.40hr)=$75,000.00 Unfavorable
f. Variable-overhead efficiency variance.
$32.40 x [($1,250,000/60) (450,000lbsx3min/60)] = $54,000.00 Favorable
g. Sales-price variance.
Revenue

450,000

$8.00

$3,600,000.00

450,000

$7.90

$3,555,000.00

$0.10x450,000=$45,000.00 Unfavorable
5. a. Explain the problem that might arise in using direct-labor hours as the basis for
applying overhead.
It seems that direct labor is not a good indicator to calculate overhead. Direct labor does not
seem to be the cost driver for the overhead. One is not dependent on the other.
b. How might activity-based costing (ABC) solve the problems described in requirement
5a?
ABC might be a better solution to find out the real cost drivers for the overhead. By studying
the activities involved in driving the overhead cost, the company can better understand what is
driving overhead.