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Exercise 14-25 Variance analysis, multiple products -- sales variances Given: Soda-King manufactures and sells 3 soft drinks:

Kola, Limor, and Orlem. Budgeted and actual results for 2011 are as follows: Budget Information for 2011 Actual Information for 2011 Selling Price Variable Cost Cartons Selling Price Variable Cost Cartons per Carton per Carton Sold per Carton per Carton Sold $8.00 $5.00 480,000 $8.20 $5.50 467,500 $6.00 $3.80 720,000 $5.75 $3.75 852,500 $7.50 $5.50 1,200,000 $7.80 $5.60 1,430,000

Product Kola Limor Orlem

1. Use the post method to calculate the individual product and total product variances requested below. Calculate all variances in terms of contribution margin. a. Compute the sales-price variance for August 2011. b. Compute the sales-mix variance for August 2011. c. Compute the sales-quantity variance for August 2011. d. Compute the sales-volume variance for August 2011.
Budget for August 2011 Selling Price Product Kola Limor Orlem per pound $8.00 $6.00 $7.50 Variable Cost per pound $5.00 $3.80 $5.50 CM per pound $3.00 $2.20 $2.00 Sales Volume in pounds 480,000 720,000 1,200,000 2,400,000 Budgeted Sales Mix 0.20 0.30 0.50 1.00 Budgeted CM $1,440,000 $1,584,000 $2,400,000 $5,424,000 $2.2600 Actual CM $1,262,250 $1,705,000 $3,146,000 $6,113,250 $2.2230 AQ Actual Quantity 2,750,000 Actual Sales Mix 0.170 Budgeted CM per Unit $3.00 AM BP $1,402,500 Sales Mix Variance ($247,500) Variance (Expressed in CM) ($140,250)

Budgeted W/A CM per unit Actual for August 2011 Selling Price Product Kola Limor Orlem per pound $8.20 $5.75 $7.80 Variable Cost per pound $5.50 $3.75 $5.60 CM per pound $2.70 $2.00 $2.20 Sales Volume in pounds 467,500 852,500 1,430,000 2,750,000 Actual W/A CM per unit AQ Actual Product Kola Quantity 2,750,000 Actual Sales Mix 0.17 Actual CM per Unit $2.70 AM AP $1,262,250 Sales Price Actual Sales Mix 0.17 0.31 0.52 1.00

Limor Orlem

2,750,000 2,750,000

0.31 0.52

$2.00 $2.20

$1,705,000 $3,146,000 $6,113,250

($170,500) $286,000 ($24,750) Sales Price Variance (Expressed in CM) Unfavorable ($24,750)

2,750,000 2,750,000

0.310 0.520

$2.20 $2.00

$1,875,500 $2,860,000 $6,138,000

$60,500 $110,000 ($77,000) Sales Mix Variance Unfavorable ($77,000)

2. What inferences can you draw from the variances computed in requirement #1?
The breakdown of the favorable sales-volume variance ($714,000 F) into a mix variance ($77,000 U) and a quantity variance ($791,000 F) shows that the biggest contributor to the change in the income of Soda-King is the 350,000 unit increase in sales. The sales price variance ($24,750 U) only partially helps to explain this change in volume. For example, the selling price of Kola is raised and its volume is reduced. However, the selling price of Orlem is raised, yet the volume of Orlem significantly increased.

Exercise 14-26 Market-share and market-size variances (continuation of 14-25). Given: Soda-King prepared the budget for 2011 assuming a 12% market share based on total sales in the western region of the United States. The total soft drinks market was estimated to reach sales of 20 million cartons in the region. However, actual total sales volume in the western region was 27.5 million cartons. Calculate the market-share and market-size variances for SodaKing in 2011. Calculate all variances in terms of contribution margin. Use the post method.
Static Budget Actual Market Size Actual Market Share Budgeted Average CM per Unit 27,500,000 X .10 X $2.260 $6,215,000 ($1,243,000) Market-Share Market Share Variance Actual Market Size Budgeted Market Share Budgeted Average CM per Unit 27,500,000 X .12 X 2.260 $7,458,000 $2,034,000 Market-Size Market Size Variance Budgeted Market Size Budgeted Market Share Budgeted Average CM per Unit 20,000,000 X .12 X $2.260 $5,424,000

Variance Unfavorable Actual Market Share (2,750,000/27,500,000) = Budgeted Market Share (2,400,000/20,000,000) = 0.12 0.10 Sales-Quantity Variance $791,000 $791,000 Favorable Sales-Volume Variance $714,000 $714,000 Sales-Mix Variance ($77,000) Unfavorable Market-Share Variance ($1,243,000) Unfavorable Favorable Sales-Quantity Variance $791,000 $791,000 Favorable

Variance Favorable

Market-Size Variance $2,034,000 Favorable

AQ Actual Quantity 2,750,000 Budgeted Sales Mix 0.200 Budgeted CM per Unit $3.00 BM BP $1,650,000

Sales Quantity Variance $210,000 Budgeted Quantity 2,400,000 Budgeted Sales Mix 0.20 Budgeted CM per Unit $3.00

BQ BM BP $1,440,000

2,750,000 2,750,000

0.300 0.500

$2.20 $2.00

$1,815,000 $2,750,000 $6,215,000

$231,000 $350,000 $791,000 Sales Quantity Variance Favorable $791,000

2,400,000 2,400,000

0.30 0.50

$2.20 $2.00

$1,584,000 $2,400,000 $5,424,000

Product Kola Limor Orlem ($37,500) $291,500 $460,000 Sales-Volume Variance $714,000 $714,000 Favorable

Exercise 14-35 Direct materials efficiency, mix, and yield variances. Given: Nature's Best Nuts produces specialty nut products for the gourmet and natural foods market. Its most popular product is Zesty Zingers, a mixture of roasted nuts that are seasoned with a secret spice mixture, and sold in one-pound tins. The direct materials used in Zesty Zingers are almonds, cashews, pistachios, and seasoning. For each batch of 100 tins, the budgeted quantities and budgeted prices of direct materials are as follows: Quantity per 100 tin batch Almonds Cashews Pistachios Seasoning Total

Input in Cups 180 300 90 30 600

Input Price per Mix cup 30% $1.00 50% $2.00 15% $3.00 5% $6.00 100%

Changing the standard mix of direct material quantities slightly does not significantly affect the overall end product, particularly for the nuts. In addition, not all nuts added to production end up in the finished product, as some nuts are rejected during inspection. In the current period, Nature's Best made 2,500 tins of Zesty Zingers in 25 batches with the following actual quantity, cost and mix of inputs: Quantity Used for 25 batches -2,500 tins Almonds Cashews Pistachios Seasoning Total

Actual Cups 5,280 7,520 2,720 480 16,000

Actual Mix 33% 47% 17% 3% 100%

Total Price per Price cup $5,280 $1.00 $15,040 $2.00 $8,160 $3.00 $2,880 $6.00 $31,360

Required: 1. What is the budgeted cost of direct materials for the 2,500 tins? 2. Calculate the total direct materials efficiency variance. 3. Why is the total direct materials price variance zero? 4. Calculate the total direct materials mix and yield variances. Actual Quantity Actual Mix Actual Price $5,280 $0 $15,040 $0 $8,160 $0 $2,880 $0 $31,360 $0 Price Var. Actual Quantity Actual Mix Budgeted Price $5,280 $480 $15,040 ($960) $8,160 $960 $2,880 ($1,920) $31,360 ($1,440) Mix Var. $5,280 $15,040 $8,160

$30,750 $610 Actual prices per cup = Budgeted prices per cup ($1,440) F Mix Var. Actual Quantity Budgeted Mix Budgeted Price $4,800 $16,000 $7,200 $4,800 $32,800

Almonds Cashews Pistachios Seasoning Total

F F F F F

U F U F F

Almonds Cashews Pistachios

$780 $40 $1,410

Seasoning Total

$2,880 $31,360

($1,620) $610
Efficiency Var.

What are the mix and yield variances telling you about the 2,500 tins produced this period? The direct materials mix variances totaling $1,440 F indicates that the actual product mix uses relatively more of less expensive ingredients than planned. In this case, the actual mix contains slightly more almonds and pistachios, while using fewer cashews and substantially less seasoning. The direct materials yield variances totaling $2,050 U is the result of needing 16,000 cups of input to produce 2,500 tins of output when the budgeted amount of input was only 15,000 cups (600 X 25 = 15,000). Are the variances large enough to investigate? The direct materials yield variance is probably significant enough to be investigated. Inputs were up (16,000 - 15,000)/15,000 = 6.7% in total. The mix variance, although smaller, should be monitored since it is favorable largely due to the use of less seasoning, which is probably considered an important element of the product's appeal to customers. Note the cost savings by replacing relatively expensive seasoning with almonds and pistachios. Mix % of Variance Budget $480 10.00% ($960) -6.00% $960 13.33% ($1,920) -40.00% ($1,440) -4.39% Actual Mix 33% 47% 17% 3% 100% Budgeted Price Per Mix Cup 30% $1.00 50% $2.00 15% $3.00 5% $6.00 100%

Almonds Cashews Pistachios Seasoning Total

U F U F

ed quantities

U er cup = Budgeted prices per cup $2,050 U Yield Var. Budgeted Quantity Budgeted Mix Budgeted Price $4,500 0.066667 $15,000 0.066667 $6,750 0.066667 $4,500 0.066667 $30,750 0.066667

Actual Quantity Budgeted Mix Budgeted Price $300 $1,000 $450 $300 $2,050 Yield Var. U U U U U U U U

$4,500 $15,000 $6,750

F U

$4,500 $30,750

Efficiency Var.

oduct mix uses

d substantially

6,000 cups of only 15,000 cups

gated. Inputs

Exercise 14-36 Direct labor variances: price, efficiency, mix, and yield variances. Given: Trevor Joseph employs two workers in his guitar-making business. The first worker, George, has been making guitars for 20 years and is paid $30 per hour. The second worker, Earl, is not as experienced, and is paid $20 per hour. One guitar requires, on average, 10 hours of labor. The budgeted direct labor quantities and prices for one guitar are as follows: Input Mix 60% 40% 100% Hourly Cost Per Pay Guitar $30 $180 $20 $80 $260

Worker George Earl Total

Hours 6 4 10

That is, each guitar is budgeted to require 10 hours of direct labor, comprised of 60% of George's labor and 40% of Earl's labor. Sometimes Earl works more hours on a particular guitar and George less, or vice versa, with no obvious change in the quality or function of the guitar. During the month of August, Joseph manufactures 25 guitars. Actual direct labor costs are as follows: Actual hrs. Total for 25 Actual Labor Price per Worker guitars Mix Cost Hour George 145 57.31% $4,350 $30.00 Earl 108 42.69% $2,160 $20.00 Total 253 100.00% $6,510 Required: 1. What is the budgeted cost of direct labor for the 25 guitars? 2. Calculate the total direct labor price and efficiency variance. Why is the total direct labor price variance zero? 3. For the 25 guitars produced, what is the total actual amount of direct labor used? What is the actual direct labor input mix percentage? What is the budgeted amount of George's and Earl's labor that should have been used for the 25 guitars? 4. Calculate the total direct labor mix and yield variances. How do these numbers relate to the total direct labor efficiency variance?

$6,500 $0 F Price Var. Actual hourly rates = Budgeted hourly rates 253 hours See table above. 250 hours ($68) F Mix Var. $10 U Efficiency is the sum of the mix

George Earl Total

Actual Quantity (Hrs.) Actual Mix Actual Price $4,350 $0 F $2,160 $0 F $6,510 $0 F Price Var.

Actual Quantity (Hrs.) Actual Mix Budgeted Price $4,350 ($204) F $2,160 $136 U $6,510 ($68) F Mix Var. $4,350 $2,160 $6,510

Actual Quantity (Hrs.) Budgeted Mix Budgeted Price $4,554 $2,024 $6,578

George Earl Total

($150) $160 $10


Efficiency Var.

What are the mix and yield variances telling you about the 25 guitars produced this period? The favorable mix variance arises from using more of the cheaper laborer (Earl) and less of the more expensive laborer (George) than the budgeted mix. The yield variance indicates that the guitars required 1.2% more total inputs (253 hours) than expected (250 hours) for the production of 25 guitars. It is likely that Earl, who is less experienced, worked more slowly than George, which caused the unfavorable yield variance. Both variances are relatively small and probably within acceptable limits. However, the owner of the company, Trevor Joseph should be careful that using more of the cheaper labor does not reduce the quality of the guitar or the perceived quality of the guitar by customers or potential customers.

and George

$10 U Efficiency Var. ates = Budgeted hourly rates

$78 U Yield Var.

U Efficiency is the sum of the mix and yield variances.

Actual Quantity (Hrs.) Budgeted Mix Budgeted Price $54 U $24 U $78 U Yield Var. F U U

Budgeted Quantity (Hrs.) Budgeted Mix Budgeted Price $4,500 0.012 $2,000 0.012 1.012 $6,500 0.012

$4,500 $2,000 $6,500

Efficiency Var.

1.20%

Exercise 14-19 Cost allocation to divisions Given: Lenzig Corporation has three divisions: Fibers, Paper, and Pulp. Lenzig's new controller, Ari Bardem, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2012: Pulp $8,500,000 4,100,000 2,000,000 $2,400,000 350 35,000 Paper $17,500,000 8,600,000 1,800,000 $7,100,000 250 24,000 Fibers $24,000,000 11,300,000 3,200,000 $9,500,000 400 66,000 Total $50,000,000 24,000,000 7,000,000 $19,000,000 1,000 125,000

Revenue Direct manufacturing costs Divisional administrative costs Division margin Number of employees Floor space (square feet)

Until now, Lenzig Corporation has allocated fixed corporate-overhead costs to the divisions based on of division margins. Bardem asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases:
Fixed Corporate Overhead Cost Category Human resource management costs Facility costs Corporate administrative costs
Total Fixed Corporate Overhead Costs

Suggested Allocation Bases $1,800,000 Number of employees 2,700,000 Floor space (square feet) 4,500,000 Divisional administrative costs

Costs

$9,000,000

Required: 1. Allocate 2012 fixed corporate-overhead costs to the 3 divisions using division margin as the allocation base. What is each division's operating margin % (division margin minus allocated fixed corporate-overhead costs as a percentage of revenue)? Pulp $1,136,842 Pulp $2,400,000 1,136,842 $1,263,158 14.86% Paper $3,363,158 Paper $7,100,000 3,363,158 $3,736,842 21.35% Fibers $4,500,000 Fibers $9,500,000 4,500,000 $5,000,000 20.83% Total $9,000,000 Total $19,000,000 9,000,000 $10,000,000 20.00%

Allocated corporate-overhead costs

Division margin Allocated corporate-overhead costs Division operating margin Division operating margin percentage

2. Allocate 2012 fixed costs using the allocation bases suggested by Bardem. What is each division's operating margin percentage under the new allocation scheme? Pulp $630,000 756,000 1,285,714 $2,671,714 Pulp $2,400,000 2,671,714 Paper $450,000 518,400 1,157,143 $2,125,543 Paper $7,100,000 2,125,543 Fibers $720,000 1,425,600 2,057,143 $4,202,743 Fibers $9,500,000 4,202,743 Total $1,800,000 2,700,000 4,500,000 $9,000,000 Total $19,000,000 9,000,000

Human resource mgmt. costs Facility costs Corporate administrative costs Total Indirect FOH Costs

Division margin Allocated corporate-overhead costs

Division operating margin Division operating margin percentage

($271,714) -3.20%

$4,974,457 28.43%

$5,297,257 $10,000,000 22.07% 20.00%

3. Compare and discuss the results of requirements 1 and 2. If division performance is linked to operating margin %, which division would be most receptive to the new allocation scheme? Which division would be the least receptive? Why? When corporate overhead is allocated to the divisions on the basis of division margins (requirement 1), each division appears profitable each having positive operating margin. The Paper division appears the most profitable having the highest operating margin % while the Pulp division appears least profitable. When Bardem's suggested bases are used to allocate fixed corporate-overhead costs (requirement 2), the Pulp division appears unprofitable having a negative operating %. Paper appears to be the most profitable -- significantly more profitable than the Fibers division. 4. Which allocation scheme should Lenzig Corporation use? Why? How might Bardem overcome any objections that may arise from the divisions? The new approach is preferable because the indirect FOH costs are divided into three homogeneous cost pools with distinctive cost drivers. These drivers are used to allocate the cost pool costs based on cause-and-effect relationships. The old method used division margins which are the result of cost relationships not the cause of them. The cost drivers used are based on logical cause and effect relationships. For example: a. HR costs are allocated using the number of employees in each division because the costs for recruitment, training, etc., are mostly related to the number of employees in each division. b. Facility costs are mostly incurred on the basis of space occupied by each division. c. Corporate administrative costs are allocated on the basis of divisional administrative costs because these costs are incurred to provide support to divisional administrations. To overcome objections from the divisions, Bardem may initially choose not to allocate corporate overhead to divisions when evaluating performance. He could start by sharing the results with the divisions, and giving themparticularly the Pulp divisionadequate time to figure out how to reduce their share of cost drivers. He should also develop benchmarks by comparing the consumption of corporate resources to competitors and other industry standards.

Exercise 14-22 Given: Figure Four is a distributor of pharmaceutical products. Its ABC system has 5 activities. Activity Area: Order processing Line-item ordering Store deliveries Carton deliveries Shelf-stocking Cost Driver Rate in 2012 $40 per order $3 per line item $50 per store delivery $1 per carton $16 per stocking-hour

Rick Flair, the controller of Figure Four, wants to use this ABC system to examine individual customer profitability within each distribution market. He focuses first on the Ma and Pa single-store distribution market. Two customers are used to exemplify the insights available with the ABC approach. Data pertaining to these two customers in August 2012 are as follows: Charleston Chapel Hill Pharmacy Pharmacy Total orders 13 10 Average line items per order 9 18 Total store deliveries 7 10 Average cartons shipped per store delivery 22 20 Average hours of shelf stocking/store delivery 0 0.5 Average revenue per delivery $2,400 $1,800 Average cost of goods sold per delivery $2,100 $1,650 Required: 1. Use the ABC information to compute the operating income of each customer in August 2012. Comment on the results and what, if anything, Flair should do. Charleston Pharmacy $16,800 14,700 $2,100 per order per line item per store delivery per carton per stocking-hour $520 351 350 154 0 $1,375 $725 Chapel Hill Pharmacy $18,000 16,500 $1,500 $400 540 500 200 80 $1,720 ($220)

Revenue Less Cost of Goods Sold Gross Profit Less Operating Costs Driver Rate Order processing $40 Line-item ordering $3 Store deliveries $50 Carton deliveries $1 Shelf-stocking $16 Total Operating Costs Operating Income

Chapel Hill Pharmacy has a lower gross margin % than Charleston and it consumes more resources to obtain this lower margin.
Gross Margin Revenue GM%

Charleston Gross Margin % Chapel Hill Gross Margin %

$2,100 $1,500

$16,800 $18,000

12.500% 8.333%

2. Flair ranks the individual customers in the Ma and Pa single-store distribution market on the basis of monthly operating income. The cumulative operating income of the top 20% of customers is $55,680. Figure Four reports negative operating income of $21,247 for the bottom 40% of its customers. Make four recommendations that you think Figure Four should consider in light of this new customer-profitability information. 1. 2. 3. 4. 5. Pay increased attention to profitable customers -- dont want to loose them Reduce the activity cost driver rates -- make value-added activities more efficient Reduce or eliminate non-value added activities Eliminate unprofitable customers who cannot be made profitable Pay bonuses based on customer operating income.

Exercise 14-34 Given: Debbie's Delight, Inc., operates a chain of cookie stores. Budgeted and actual operating data of its three Chicago stores for August 2009 are as follows:
Budget for August 2009 Selling Price per pound Variable Cost per pound 2.50 2.70 2.90 3.00 3.40 CM per pound 2.00 2.30 2.60 3.00 3.10 Sales Volume in pounds 45,000 25,000 10,000 5,000 15,000 100,000 Budgeted W/A CM per unit Actual for August 2009 Selling Price per pound Variable Cost per pound 2.60 2.90 2.80 3.40 4.00 CM per pound 1.90 2.30 2.70 2.60 3.00 Sales Volume in pounds 57,600 18,000 9,600 13,200 21,600 120,000 Actual W/A CM per unit Actual Sales Mix 0.48 0.15 0.08 0.11 0.18 1.00 Actual TCM 109,440 41,400 25,920 34,320 64,800 275,880 $2.30 Budgeted Sales Mix 0.45 0.25 0.10 0.05 0.15 1.00 Budgeted TCM 90,000 57,500 26,000 15,000 46,500 235,000 $2.35

Chocolate chip Oatmeal raisin Coconut White chocolate Macadamia nut Total

4.50 5.00 5.50 6.00 6.50

Chocolate chip Oatmeal raisin Coconut White chocolate Macadamia nut

4.50 5.20 5.50 6.00 7.00

Debbie's Delight focuses on CM in its variance analysis. Required: 1. Compute the total sales-volume variance for August 2009. 2. Compute the total sales-mix variance for August 2009. 3. Compute the total sales-quantity variance for August 2009.
Actual Quantity Sold Actual Sales Mix Actual CM per Unit

Sales Price (in CM) Variance $109,440 $41,400 $25,920 $34,320 $64,800 $275,880 $2.30 ($5,760) $0 $960 ($5,280) ($2,160) ($12,240) Sales Price (in CM) Variance Unfavorable (SP - VC)

Actual Quantity Sold Actual Sales Mix Budgeted CM per Unit 120,000 X .48 X $2.00 = 120,000 X .15 X $2.30 = 120,000 X .08 X $2.60 = 120,000 X .11 X $3.00 = 120,000 X .18 X $3.10 =

Chocolate chip Oatmeal raisin Coconut White chocolate Macadamia nut

120,000 X .48 X $1.90 = 120,000 X .15 X $2.30 = 120,000 X .08 X $2.70 = 120,000 X .11 X $2.60 = 120,000 X .18 X $3.00 =

4. Comment on your results in requirements 1, 2, 3.

Debbie's Delight shows a favorable sales-quantity variance because it sold more cookies in total (120,000#'s) than was budgeted (100,000#'s). Together with the higher quantities, Debbie's also sold more of the high-contribution margin white chocolate and macadamia nut cookies relative to the budgeted mix -- hence, Debbie's also showed a favorable total sales-mix variances. ($2.40 - $2.35) The Sales Price (Expressed in CM) Variance which is unfavorable reflects the fact that differences in sales price and variable cost from budgeted values decreased income by $12,240.

Exercise 14-35 Given: Debbie's Delight expects to attains a 10% market share based on total sales of the Chicago market. The total Chicago market is expected to be 1,000,000 pounds in sales volume for August 2009. The actual total Chicago market for August 2009 was 960,000 pounds in sales volume. Required: Compute the market-share and market-size variances for Debbie's Delight in August 2009. Report all variances in CM terms. Comment on the results.
Actual Market Size Actual Market Share Budgeted Average CM per Unit Market Share Variance Actual Market Size Budgeted Market Share Budgeted Average CM per Unit

960,000 X .125 X $2.35 $282,000 Actual Market Share (120,000/960,000) = .125 0.125

$56,400 Market-Share Variance Favorable

960,000 X .10 X 2.35 $225,600

Sales-Quantity Variance $47,000 $47,000 Favorable By increasing its actual market share from the 10% budgeted to the actual 12.5%, Debbie's Delight has a favorable market-share variance of $56,400. There is a smaller offsetting unfavorable market-size variance of $9,400 due to the 40,000 unit decline in the Chicago market (from 1,000,000 budgeted to an actual of 960,000).

Overview of 14-34 and 14-35:

$53,120 Sales-Volume Variance $53,120 F Sales-Quantity Variance $47,000 F Market-Share Variance $56,400 F

Sales-Mix Variance $6,120 F

Market-Size Varianc

Static Budget Sales Mix Variance $115,200 $41,400 $24,960 $39,600 $66,960 $288,120 $2.40 $7,200 ($27,600) ($6,240) $21,600 $11,160 $6,120 Sales Mix Variance Favorable Sales-Volume Variance $53,120 $53,120 Favorable Actual Quantity Sold Budgeted Sales Mix Budgeted CM per Unit 120,000 X .45 X $2.00 = 120,000 X .25 X $2.30 = 120,000 X .10 X $2.60 = 120,000 X .05 X $3.00 = 120,000 X .15 X $3.10 = $108,000 $69,000 $31,200 $18,000 $55,800 $282,000 $2.35 Sales Quantity Variance $18,000 $11,500 $5,200 $3,000 $9,300 $47,000 Sales Quantity Variance Favorable Budget Quantity Sold Budgeted Sales Mix Budgeted CM per Unit 100,000 X .45 X $2.00 = 100,000 X .25 X $2.30 = 100,000 X .10 X $2.60 = 100,000 X .05 X $3.00 = 100,000 X .15 X $3.10 =

ual Quantity Sold

ctual Sales Mix

geted CM per Unit

es in total (120,000#'s)

margin white chocolate ed a favorable total

differences in sales price

o market. The total Chicago tal Chicago market for

Static Budget Market Size Variance Budgeted Market Size Budgeted Market Share Budgeted Average CM per Unit

tual Market Size

eted Market Share

d Average CM per Unit

000 X .10 X 2.35 ($9,400) Market-Size Variance Unfavorable

1,000,000 X .10 X $2.35 $235,000 Budgeted Market Share (100,000/1,000,000) = .10 0.10

Quantity Variance

Market-Size Variance $9,400 U

dget Quantity Sold

dgeted Sales Mix $90,000 $57,500 $26,000 $15,000 $46,500 $235,000 $2.35

geted CM per Unit

Exercise 14-37 Given: PDS Manufacturing makes wooden furniture. One of their products is a wooden dresser. The exterior and some of the shelves are made of oak, a high quality wood, but the interior drawers are made of pine, a less expensive wood. The budgeted direct materials quantities and prices for one dresser are: Price Per Unit of Input $6.00 2.00 Cost For One Dresser $48 24 $72

Quantity Type of Wood Oak Pine Total


Board Feet

8 12 20

Budgeted Mix 0.40 0.60

$3.60

That is, each dresser is budgeted to use 20 board feet of wood, comprised of 40% oak and 60% pine, although sometimes more pine is used in place of oak with no obvious change in the quality or function of the dresser. During the month of May, PDS manufactures 3,000 dressers. Actual direct materials costs are:
Board Feet

Oak Pine

23,180 37,820 61,000

Actual Mix Actual Cost Per Unit Cost 0.38 $141,398 $6.10 0.62 $68,076 $1.80 $209,474

$3.43

Required: 1. What is the budgeted cost of direct materials for 3,000 dressers? 3,000 X 20 X $3.60 = $216,000 60,000

2. Calculate the total direct materials price and efficiency variances. See below. DM Price Variance DM Efficiency Variance ($5,246) Favorable ($1,280) Favorable

3. For the 3,000 dressers, what is the total actual amount of oak and pine used? See below. 61,000

What is the actual DM input mix percentage?


Board Feet

Oak Pine

23,180 37,820 61,000

Actual Mix Actual Cost 0.38 $141,398 0.62 $68,076 $209,474

What is the budgeted amount of oak and pine that should have been used for the 3,000 dressers? Oak Pine 3,000 X 20 X .40 = 3,000 X 20 X .60 = 24,000 36,000 60,000

4. Calculate the total direct materials mix and yield variances. How do these numbers relate to the total direct materials eficiency variance? What do these variances tell you?

Actual Quantity Actual Mix Actual Price Price Variance $141,398 $68,076 $209,474 $2,318 (7,564) ($5,246) Price Favorable

Actual Quantity Actual Mix Budgeted Price 61,000 X .38 X $6 = 61,000 X .62 X $2 =

Oak Pine

61,000 X .38 X $6.10 = 61,000 X .62 X $1.80 =

Price Variance:

The net $5,246 favorable price variance results from a decrease in the price per board foot of pine of sufficient magnitude to offset and unfavorable price increase per board foot of oak. The favorable mix variance arises from using more of the cheaper pine (and less oak) than the budgeted mix. The yield variance indicates that the dressers required more total inputs (61,000 b.f.) than expected (60,000 b.f.) for the production of 3,000 dressers.

Mix Variance:

Yield Variance:

Both variances are relatively small and probably within tolerable limits. PDS should investigate whether substituting the cheaper pine for the more expensive oak caused the unfavorable yield variance. PDS should also be careful that using more of the cheaper pine does not reduce the quality of the dresser or how the customers perceive it.

e exterior and some of the ss expensive wood. The

0% pine, although n of the dresser.

000 dressers?

relate to the

ctual Quantity Actual Mix $139,080 $75,640 $214,720 Mix Variance ($7,320) 2,440 ($4,880) Mix Variance ($4,880) Favorable

Actual Quantity Budgeted Mix Budgeted Price 61,000 X .40 X $6 = 61,000 X .60 X $2 = $146,400 $73,200 $219,600 ($1,280) Efficiency Favorable ($1,280) Yield Unfavorable $3,600 Yield Variance $2,400 1,200 $3,600

Budgeted Quantity Budgeted Mix Budgeted Price 60,000 X .40 X $6 = 60,000 X .60 X $2 =

udgeted Price

in the price per board ice increase per board

Alternative Calculation of Yield Variance

er pine (and less oak)

al inputs (61,000 b.f.)

20.3333333 20.0000000 0.3333333 $3.60 $1.2000000 3,000 $3,600

Actual BF of input per dresser produced Budgeted BF of input per dresser produced Extra BF of input per dresser produced W/A budgeted cost per BF of input Extra cost per dresser produced Dressers produced Unfavorable Yield Variance

Alternative Calculation of Yield Variance

ive oak caused the

e quality of the dresser

0.0500000 0.0491803 0.0008197 $72 $0.0590164 61,000 $3,600

Budgeted: Dressers per BF of input Actual: Dressers per BF of input Decreased dressers per BF of input W/A budgeted cost per dresser Extra cost per BF of input BF of input Unfavorable Yield Variance

udgeted Quantity Budgeted Mix $144,000 72,000 $216,000

Budgeted Price

Exercise 14-31 Given: Sherriton's loyalty program consists of three different customer loyalty levels. Bronze Card Available to all new customers. Complimentary bottle of wine/night $20 Restaurant coupons/night 10% discount off the nightly rate Silver upgrade After 20 night's "stay and pay" Complimentary bottle of wine/night $30 Restaurant coupons/night 20% discount off the nightly rate Gold upgrade After 50 night's "stay and pay" Complimentary bottle of champagne/night $40 Restaurant coupons/night 30% discount off the nightly rate The average full price for one night's stay Other variable cost per night stayed Total fixed costs for the chain are Sherriton operates:

$5 cost to company $10 cost to company 10% nightly discount

$5 cost to company $15 cost to company 20% nightly discount

$20 cost to company $20 cost to company 30% nightly discount $200 $65 $140,580,000 10 500 365 80%
# of Customers 2,430 8,340 80,300 219,000

hotels rooms per hotel days per year average occupancy rate
Average # of Nights 60 35 10 1

Loyalty program characteristics:


Customer Type Gold Silver Bronze No Program

Required: 1. Calculate the program CM for each of the customer types. Which is most profitable? Which is the least profitable? Do not allocate fixed costs to individual rooms or specific loyalty programs. 2. Prepare an income statement for Sherriton for the year ended 12/31/2006? Gold Revenues 1st 20 nights 21st to 50th night 51st to 60th night Variable Costs VC of hotel room Wine Champagne Restaurant costs 1st 20 nights 21st to 50th night

$8,748,000 11,664,000 3,402,000 $9,477,000 607,500 486,000 486,000 1,093,500

$23,814,000

51st to 60th night Contribution margin Silver Revenues 1st 20 nights 21st to 35th night Variable Costs VC of hotel room Wine Restaurant costs 1st 20 nights 21st to 35th night Contribution margin Bronze Revenues 1st 10 nights Variable Costs VC of hotel room Wine Restaurant costs Contribution margin No Program Revenues VC of Hotel room Contribution margin Summary Revenue Variable Costs Contribution margin Fixed Costs Operating Income Contribution margin %

486,000

12,636,000 $11,178,000

$30,024,000 20,016,000 $18,973,500 1,459,500 1,668,000 1,876,500

$50,040,000

23,977,500 $26,062,500

$144,540,000 $52,195,000 4,015,000 8,030,000

64,240,000 $80,300,000

$43,800,000 14,235,000 $29,565,000 Gold $23,814,000 12,636,000 $11,178,000 Silver $50,040,000 23,977,500 $26,062,500 Bronze $144,540,000 64,240,000 $80,300,000
No Program

$43,800,000 14,235,000 $29,565,000

46.939% Lowest

52.083%

55.556%

67.500% Highest

3. What is the average room rate per night? What are the average VC per night inclusive of the loyalty program? Total nights Gold 145,800 Silver 291,900 Bronze 803,000 No program 219,000 Total 1,459,700 Total revenues $262,194,000 Average room rate per night $179.62 Total variable costs $115,088,500 Average VC per night $78.84

4. Explain what drives the profitability (or lack thereof) of Sherriton's loyalty program. Loyalty programs aim to generate profitable repeat business. Given the low level of variable costs to room rates, there is considerable cushion available for Sherriton to offer high inducements for frequent stayers. Added questions: 5. Does it appear that Sherriton's loyalty program is working? Sherriton operates: 10 500 365 80%
Customer Type Gold Silver Bronze No Program # of Customers 2,430 8,340 80,300 219,000

hotels rooms per hotel days per year average occupancy rate
Average # of Nights 60 35 10 1 Total Rentals

Loyalty program characteristics: 145,800 291,900 803,000 219,000 1,459,700

Total rooms available for rent Rooms rented Average occupancy rate Average CM per rental Total CM Decrease in TCM post-plan No!

Pre-Plan 1,825,000 1,460,000 0.80000 $135 $197,100,000

Post-Plan 1,825,000 1,459,700 0.79984 $100.78 $147,105,500 $49,994,500

6. How might your answer to question 5 be improved with some additional data? 1. Was there a change in the industry market size? More travel? Fewer/More available rooms? 2. What extra revenue was generated because of the restaurant coupons. 3. A loyalty plan might work well for some hotels or geographical areas but not in others.

Total $262,194,000 115,088,500 $147,105,500 140,580,000 $6,525,500 2

Exercise 14-37 Given: Greenwood, Inc., processes apples into applesauce and apple butter. Greenwood's applesauce is made with a blend of Tolman, Golden Delicious, and Ribston apples. Budgeted and actual costs to produce 150,000 pounds of applesauce in November 2006 are as follows: Actual Quantity (Pounds) 72,000 180,000 108,000 360,000 Flexible Budgeted Quantity 52,500 210,000 87,500 350,000

Applesauce Tohlman Golden Delicious Ribston Total Required: 1. Calculate the total DM price and efficiency variance for November 2006. 2. Calculate the total direct materials mix and yield variances for November 2006. 3. Comment on your results in requirement 1 and 2.
Actual Quantity Actual Mix Actual Price Price Variance $25,200 $52,200 $23,760 $101,160 ($3,600) (1,800) 2,160 ($3,240) Price Favorable

Actual Mix 0.20 0.50 0.30 1.00

Actual Price $0.35 $0.29 $0.22

Actual Cost $25,200 52,200 23,760 $101,160

Budgeted Mix 0.15 0.60 0.25 1.00

Actual Quantity Actual Mix Budgeted Price 360,000 X .20 X $.40 = 360,000 X .50 X $.30 = 360,000 X .30 X $.20 =

Tohlman Golden Delicious Ribston

360,000 X .20 X $.35 = 360,000 X .50 X $.29 = 360,000 X .30 X $.22 =

Greenwood paid less per pound for Tolman and Golden Delicious apples than budgeted and, so it had a favorable direct materials price variance of $3,240 (F). It also had an unfavorable efficiency variance of $2,900. Greenwood would need to evaluate if these were unrelated events or if the lower price resulted from the purchase of apples of poorer quality that affected efficiency. The net effect in this case from a cost standpoint was favorable -- the savings in price being greater than the loss in efficiency. Of course, if the applesauce is of poorer quality, Greenwood must also evaluate the potential effects on current and future revenues that have not been considered in the variances above. The unfavorable efficiency is entirely attributable to an unfavorable yield ( the mix variance nets to zero). Management should evaluate the reasons for the unfavorable yield variance. Is it due to poor quality Tolman and Ribston apples which were acquired at a price lower than budgeted.

sauce is made with a blend 50,000 pounds of applesauce

Budgeted Price $0.40 $0.30 $0.20

Budgeted Cost $21,000 63,000 17,500 $101,500

ctual Quantity Actual Mix $28,800 $54,000 $21,600 $104,400 Mix Variance $0 Mix Variance $7,200 (10,800) 3,600 $0

Actual Quantity Budgeted Mix Budgeted Price 360,000 X .15 X $.40 = 360,000 X .60 X $.30 = 360,000 X .25 X $.20 = $21,600 $64,800 $18,000 $104,400 $2,900 Efficiency Unfavorable $2,900 Yield Unfavorable $2,900 Yield Variance $600 1,800 500 $2,900

Budgeted Quantity Budgeted Mix Budgeted Price 350,000 X .15 X $.40 = 350,000 X .60 X $.30 = 350,000 X .25 X $.20 = $21,000 63,000 17,500 $101,500

udgeted Price

Alternative Calculation of Yield Variance

d and, so it had a favorable direct

luate if these were unrelated fected efficiency. The net effect an the loss in efficiency.

2.33333333 2.4000000 -0.0666667 $0.290000 ($0.01933) 150,000 ($2,900.00)

Budgeted #'s of input per # of output Actual #'s of input per # of output Extra #'s of input per # of output W/A budgeted cost per # of input Extra cost per # of output Pounds of output Unfavorable Yield Variance

ential effects on current and


Alternative Calculation of Yield Variance

nce nets to zero). Management Tolman and Ribston apples which

0.42857143 0.4166667 0.01190476 $0.676667 $0.008056 360,000 $2,900.00

Budgeted: #'s of output per # of input Actual: #'s of output per # of input Decreased #'s of output per # of input W/A budgeted cost per # of output Extra cost per # of input Pounds of input Unfavorable Yield Variance

Exercise 14-36 Given: The Energy Products Company produces a gasoline additive, Gas Gain, that increases engine efficiency and improves gasoline mileage. The actual and budgeted quantities (in gallons) of materials required to produce Gas Gain and the budgeted prices of materials in August 2003 are as follows: Flexible Actual Actual Budgeted Budgeted Actual Budgeted Chemical Quantity Mix Quantity Mix Price Price Echol 24,080 0.28 25,200 0.30 $0.22 $0.20 Protex 15,480 0.18 16,800 0.20 $0.46 $0.45 Benz 36,120 0.42 33,600 0.40 $0.12 $0.15 CT-40 10,320 0.12 8,400 0.10 $0.27 $0.30 Total 86,000 1.00 84,000 1.00 Required: 1. Calculate the total DM efficiency variance for August 2003. 2. Calculate the total direct materials mix and yield variances for August 2003. 3. What conclusions would you draw from the variance analysis?
Actual Quantity Actual Mix Actual Price Price Variance $5,297.60 $7,120.80 $4,334.40 $2,786.40 $19,539.20 Actual Quantity Actual Mix Standard Price $4,816.00 $6,966.00 $5,418.00 $3,096.00 $20,296.00 Mix Variance ($344.00) ($774.00) $258.00 $516.00 ($344.00) Mix Favorable

Echol Protex Benz CT-40

86,000 X .28 X $.22 = 86,000 X .18 X $.46 = 86,000 X .42 X $.12 = 86,000 X .12 X $.27 =

$481.60 86,000 X .28 X $.20 = $154.80 86,000 X .18 X $.45 = ($1,083.60) 86,000 X .42 X $.15 = ($309.60) 86,000 X .12 X $.30 = ($756.80) Price

Energy products used a larger total quantity of direct-material inputs than budgeted, and so showed an unfavorable yield variance. The mix variance was favorable because the actual mix contained more of the budgeted cheapest input, Benz, and less of the most costly input, Protex, than the budgeted mix. The favorable mix variance offset some, but not all, of the unfavorable yield variance -the overall efficiency variance was unfavorable. Energy Products will find it profitable to shift to the cheaper mix only if the yield from this cheaper mix can be improved. Energy products must also consider the effect on output quality of using the cheaper mix, and the potential consequences for future revenues.

Actual Quantity Standard Mix Standard Price 86,000 X .30 X $.20 = 86,000 X .20 X $.45 = 86,000 X .40 X $.15 = 86,000 X .10 X $.30 = $5,160.00 $7,740.00 $5,160.00 $2,580.00 $20,640.00 $136.00 Efficiency Unfavorable Yield Variance

Standard Quantity Standard Mix Standard Price $5,040.00 $7,560.00 $5,040.00 $2,520.00 $20,160.00

$120.00 84,000 X .30 X $.20 = $180.00 84,000 X .20 X $.45 = $120.00 84,000 X .40 X $.15 = $60.00 84,000 X .10 X $.30 = $480.00 Yield Unfavorable