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Problems
Problem 21-1: Beta Division
Bdgt. Vol. @
Bdgt Mix @
Bdgt. Margin
Act. Vol. @
Bdgt. Mix @
Bdgt. Margin
3,200 @ $10
= $32,000
Mix Var.
3,072 @ $10
= $30,720
$1,280 U
1,700 @ $13
= $22,100
5,100 @ $9
= $45,900
Act. Vol. @
Act. Mix @
Act. Margin
2,850 @ $10
= $28,500
$ 2,220 U
1,632 @ $13
= $21,216
884 U
Total
Act. Vol. @
Act. Mix @
Bdgt. Margin
2,850 @ $10.20
= 29,070
$ 570 F
2,500 @ $13
= $32,500
11,284 F
4,896 @ $9
= $44,064
2,500 @ $12.58
= $31,450
1,050 U
4,250 @ $9
= $38,250
4,250 @ $8.80
= $37,400
1,836 U
5,814 U
850 U
$4,000 U
$ 3,250 F
$1,330 U
$2,080 U Net
2007 McGraw-Hill/Irwin
Chapter 21
a. Mix variance
Product A
Produce B
Actual quantity........................................................................................................................................................
310
186
Standard proportion of actual (1).............................................................................................................................
298
198
Difference................................................................................................................................................................
+ 12 units
- 12 units
Sales.........................................................................................................................................
300 @ $5.50
$1,650
(2) 200 @ 5.45
1,090
$2,740
Change in gross margin
Actual
310 ($5.50) = $1,705
186 ($5.45) = $1013.7
Actual
$2718.70
Budgeted
Sales Units (2740.0)
X Actual
Selling
$21.3
d. As illustrated below, a unit margin variance of -164.3 would have occurred:
Product A...........................................................................................................................................
($1.40 - $1.90) x 310 =
-155.0
Product B...........................................................................................................................................
($1.45 - $1.50) x 186 =
-9.3
-164.3
1. Standard proportion:
A
B
300/500 = .6
200/500 = .4
2. If Product A sells for $5.50 per unit, then 310 units would show total sales of $1,705, leaving Product
B sales at $1,013.7, or $5.45/unit.
Anthony/Hawkins/Merchant
=
=
$10,500U
5,550F
$ 4,950U
=
=
$7,000F
0
$7,000F
Labor variances:
Standard labor per unit, A: $50 $20/hr. = 2.5 hrs./unit
Standard labor per unit, B: $30 $20/hr. = 1.5 hrs. unit
Efficiency variance:
Rate variance:
=
[$20 ($187,110 9,450 hr.] x 9,450]
Net labor variance =
1,890F
$ 890F
Materials variances:
Standard materials per unit, A: $60 $1.50/lb. = 40 lbs.
Standard materials per unit, B: $45 $1.50/lb. = 30 lbs.
Usage variance:
[(1,900 x 40) + (3,100 x 30) 180,000] x $1.50 = $16,500 U
Price variance:
[$1.50 - $275,400 180,000)] x 180,000
5,400U
2007 McGraw-Hill/Irwin
Chapter 21
= $21,900U
= $40,304U
=
356F
= $39,948U
Overhead variances:
Spending variance:
Volume variance:
= $58,908U
Budget
Actual
Revenues..............................................................................................................................................................................
$914,800
$908,000
Cost of goods sold................................................................................................................................................................
667,100
658,250
Gross margin @ std..............................................................................................................................................................
247,700
249,750
Production cost variances:
Materials usage................................................................................................................................................................
-(16,500)
Materials price.................................................................................................................................................................
-(5,400)
Labor efficiency..............................................................................................................................................................
-(1,000)
Labor rate........................................................................................................................................................................
-1,890
Overhead volume............................................................................................................................................................
-356
Overhead spending..........................................................................................................................................................
-(40,304)
Total variances.................................................................................................................................................................
-(60,958)
Gross margin, actual.............................................................................................................................................................
$247,700
$188,792
Standard gross margin increased by $2,050 because of a $4 per unit higher margin on Product A; but a
shift in product mix toward lower-margin Product B more than eliminated this gain. The production cost
variances are self-explanatory, except for the overhead volume variance; this $356 represents the amount
our predetermined standard overhead cost per unit overcharged products for overhead, because our
planned overhead was $1.20 per direct labor dollar, but our actual overhead was way overspent ($40,304).
(Some students will offer details on the other production cost variances, which is fine.)
Problem 21-4: Inman Company
a
Anthony/Hawkins/Merchant
Operating income............................................................................................................................................................................
$ 42,000
$ 50,000
$ (8,000)
2007 McGraw-Hill/Irwin
b.
(1)
Chapter 21
=
=
$142,500
150,000
$ 7,500U
*Budgeted mfg. overhead per unit = $130,000 20,000 = $6.50; this plus budgeted direct material ($3.00) and direct labor
($3.00) gives a budgeted unit cost of $12.50.
=
=
=
$123,500
142,500
$ 19,000U
Budgeted (given)
= $100,000
Actual (given)
=
99,000
Favorable selling and administration variance................................................................................................
$1,000F
Sum of (l) through (6): $36,000 U = $14,000 actual - $50,000 budget
Note: Both (5) and (6) can be decomposed into volume and spending components. There is not enough
information given to decompose (3) and (4) into price and usage components.
Anthony/Hawkins/Merchant
Cases
Case 21-1: Campar Industries, Inc.
Note: This case is unchanged from the Eleventh Edition.
Approach
This problem set can be completed in one class session. Alpha is a straightforward calculation of gross
margin variances. Beta introduces the gross margin mix variance. Gamma gives the student the
opportunity to apply the mix concept to raw materials. Delta is a review problem, containing both margin
and production cost variances.
Alpha Division
Actual Quantity)
Standard
=
Mix Variance
Price
Material X......................................................................................................................................................................................
(6,000
5,500)
*
$1.69
=
$ 845 F
Material Y......................................................................................................................................................................................
(4,000
4,500)
*
$2.34
=
1,170 U
$ 325 U
Price variance:
Standard Price
Actual Price)
* Actual Quantity = Price Variance
Material X......................................................................................................................................................................................
($1.69
$1.69)
*
5,500
=
$0
Material Y......................................................................................................................................................................................
($2.34
$2.53)
*
4,500
=
855 U
$855 U
Usage variance:
(Standard quantity
(9,900
Net variance:
Actual quantity)
10,000)
*
*
Standard Price
$1.95
=
=
Usage variance
$195 U
Mix variance
$325 U
Check:
+
+
Price variance
$855 U
Usage variance
$195 U
=
=
$1,375 U
Actual cost
$20,680
2007 McGraw-Hill/Irwin
Standard cost
Net variance
Chapter 21
=
=
19,305
$1,375U
Beta Division
Bdgt. Vol. @
Bdgt Mix @
Bdgt. Margin
Act. Vol. @
Bdgt. Mix @
Bdgt. Margin
Sales Vol. Var.
Pdt.
1
2
3
Total
Act. Vol. @
Act. Mix @
Bdgt. Margin
Pdt. Mix Var.
Act. Vol. @
Act. Mix @
Act. Margin
Unit Margin Var.
3,200 @ $12
= $38,400
$1,536 U
3,072 @ $12
= $36,864
$2,664 U
2,850 @ $12
= $34,200
$684 F
2,850 @ $12.24
=$34,884
1,700 @ $15.60
= $26,520
$1,061 U
1,632 @ $15.60
= $25,459
$13,541 F
2,500 @ $15.60
= $39,000
$1,250 U
2,500 @ $15.10
= $37,750
$2,203 U
$4,800 U
4,896 @ $10.80
= $52,877
+
$6,977 U
$3,900 F
4,250 @ $10.80
= $45,900
+
$1,020 U
$1,586 U
4,250 @ $10.56
= $44,880
= $2,486 U Net
5,100 @ $10.80
= $55,080
2007 McGraw-Hill/Irwin
Chapter 21
There are two mistakes students frequently make in this analysis. First, some forget to change the order of
subtraction in the gross margin mix variance formula with the result that they show a favorable mix
variance. A little discussion quickly reveals why it must be unfavorable, and reminds them again that
whether a variance is favorable or unfavorable should be a matter of common sense (Will the
phenomenon described tend to increase or decrease profit?) rather than algebraic sign. Second, some
students calculate the mix variance this way
X:
Y:
(Standard Mix
(5,940
(3,960
Actual Quantity)
5,500)
4,500)
*
*
*
Standard Price
$1.69
$2.34
=
=
$ 744 F
1,264 U
$ 520 U
Since 5,940 + 3,960 = 9,900 rather than 10,000, this approach changes both the mix and the quantity
between the terms in parentheses. Thus, this would give a combined mix and usage variance; note that in
the correct calculation, the sum of the mix and usage variance is in fact $520 unfavorable.
Delta Division
Gross margin variances:
Budgeted unit margin, A = $300 - ($72 + $62.50 + $75) = $90.50
Budgeted unit margin, B = $185 - ($54 + $37.50 + $45) = $48.50
Actual unit margin, A = ($533,750 / 1,750) - $209.50 = $95.50
Actual unit margin, B = ($601,250 / 3,250) - $136.50 = $48.50
Sales volume variance: $0. This can be determined by inspection because both actual and
budgeted total volumes were 5,000 units.
Mix variance:
A: (1,750 -1,900) * $90.50
B: (3,250 - 3,100) * $48.50
Unit margin variance:
A: ($95.50 - $90.50) * 1,750
B: (by inspection)
=
=
$13,575 U
7,275 F
$6,300 U
$ 8,750F
0
$8,750 F
Net margin variance = $6,300 U + $8,750 F = $2,450 F
Materials variances:
Standard materials per unit, A: $72 / $l.80/lb. = 40 lbs.
Standard materials per unit, B: $54 / $l.80/lb. = 30 lbs.
Usage variance:
[(l,800 * 40) + (3,300 * 30) - 180,000] * $1.80 = $16,200 U
Price variance:
[$1.80 - ($330,480 / 180,000)] * 180,000
Net materials variances:
=
=
11
$ 6,480 U
$22,680 U
Anthony/Hawkins/Merchant
Labor variances:
Standard labor per unit. A: $62.50 / $25/hr. = 2.5 hrs.
Standard labor per unit, B: $37.50 / $25/hr. = 1.5 hrs.
Efficiency variance:
[(1,800 * 2.5 + 3,300 * 1.5) - 9,450] * $25 = $0
Rate variance:
[$25 - ($233,880 / 9,450)] * 9,450
Net labor variance
=
=
Overhead variances:
Spending variance:
$94,000 + $0.80 (233,880) - $320,000
Volume variance:
$1.20 (233,880) - $281,104
Net overhead variance
Sum of all variances (profit variance):
$2,450F + $22,680U + $2,370F + $39,344U
$2,370 F
$2,370 F
$38,896 U
448 U
$39,344 U
$57,204 U
12
2007 McGraw-Hill/Irwin
Chapter 21
=
=
$38,000F
6,000U
$32,000F
=
=
$3,243F
9,243U
$6,000U
$2,000U
$8,000U
=
=
=
=
=
=
$21,000U
$ 3,000F
$18,000U
$11,384U
26,496U
$37,880U
$15,000U
23,120U
$38,120U
190,000 / 0.0925
200,000 / 0.10
Fixed overhead absorption rate. Alternatively, at this point one can deduce that the overhead budget equation is
$150,000 fixed cost plus $0.75 per unit variable cost. Thus, the budget for 180,000 units is $285,000 and the absorbed
(@ $1.50 per unit) is $270,000, giving a production volume variance of $15,000 U.
13
Anthony/Hawkins/Merchant
Summary:
=
=
$905,850F
225,225U
$680,625
=
=
$25,525F
21,942F
$47,467F
=
=
$23,058U
45,000F
$21,942F
=
=
$250,480U
56,500F
$193,980U
=
=
This teaching note was prepared by Professor James S. Reece. Copyright by James S. Reece.
14
$ 51,888U
64,560U
$116,448U
2007 McGraw-Hill/Irwin
Chapter 21
$133,475U
This is the fixed overhead absorption rate (see Appendix of Chapter 20)
=
=
$ 35,100U
$ 247,135U
=
=
=
$4,529,250
5,255,388
$ 726,138U
=
=
=
=
193,980U
116,448U
133,475U
35,100U
479,003U
$ 247,135U
As a check, the variances in categories A-D calculated above total $680,625 F + 47,467 F +
193,980 U + 116,448 U + 133,475 U + 35,100 U + 247,135 U = $1,954F, which is the income
variance to be explained.
As a summary for the board of directors, I would present the numbers as follows: (The
explanation contains a few conjectures, which Marilyn Mynar would easily be able to validate;
this is done simply to remind students that the report should contain some reasons for balances,
not just the numbers.)
1. We increased our unit selling price by $11 (or 11.7%). If our production costs had not
increased this would have increased our pretax profit by $905,850
2. However, this price increase caused our sales volume to decline by 5,775 units (6.6%). At last
years price and cost levels, the impact of this decline was to reduce pretax profit by
$225,225.
3. This decrease in unit sales did have a favorable impact on pretax profits in one respect based
on last years per-unit selling cost, the volume decline saved us $25,525 in selling costs
(primarily salespeoples commissions).
4. Our variable selling cost per unit, however, increased by $0.28 (or 6.3%), primarily because
of salespeoples commissions related to the higher per-unit selling price. This increase caused
pretax profit to decline by $23,058.
5. Other selling costs and administrative costs were reduced by $45,000, with a corresponding
favorable impact on pretax profit.
6. Increases in the purchase price of materials and labor rates caused pretax profit to decline by
$302,368. We were more efficient in using materials than last year, but our labor was less
15
Anthony/Hawkins/Merchant
productive; the combined effect of material usage and labor efficiency decreased pretax profit
by $8,060.
7. Our factory worked at less than its usual volume this year, which increased the production
cost of each unit because fixed factory overhead was spread over a lower volume. This had
the effect of reducing pretax profit by $133,475.
8. Our factory overhead costs also increased considerably, reducing pretax profit by $282,235.
9. To sum up, pretax profit increased $1,954 for these reasons:
16