Chap 016

Chapter 16 - Operational Performance Measurement: Further Analysis of Productivity and Sales
CHAPTER 16
OPERATIONAL PERFORMANCE MEASUREMENT: FURTHER
ANALYSIS OF PRODUCTIVITY AND SALES
QUESTIONS
16-1 Productivity is the ratio of output to input. It is a measure of the amount of output
produced per unit or per dollar of input.
16-2 To be a successful low cost provider in its industry a firm needs to be able to
manufacture the product using fewer resources - materials, labors, or other
resources - than its competitors. Improving productivity is the best strategy to
attain more products or services with fewer resources.
16-3 Two of the most often used criteria for assessing productivity and their
advantages and disadvantages are:
1. Prior year’s productivity
Advantages:
 Data readily available
 Facilitating monitoring of continuous improvements
Disadvantages:
 Difficult to assess adequacy of productivity improvements
 Changes in productivities from one year to the next may be a result of
several factors. The changes might be a result of changes in operating
factors such as new equipment, product design, or technology.
2. Best performance of the industry or practice

Advantages:
 Uses of the best practice in the industry or anywhere as the benchmark. A
favorable comparison to such a productivity benchmark positions the firm
to be the leader of the industry.
 Motivating people to strive for their maximum potentials.
Disadvantages:
 The standard might be too high and can be frustrating to workers.
 Difficult to obtain proper data.
 The benchmark may be inappropriate or not completely comparable for
the operation.
16-4 Operational productivity is the conversion ratio of an input resource to the output.
It is a physical measure on the unit of output produced from one unit of a
resource.
16-1
Financial productivity measures the relationship between the output and the cost
of one or more of the input resources. It is a measure of the unit of output or the
sales values of output produced per dollar of one or more resources.
16-5 Partial productivity is a productivity measure that focuses only on the relationship
between the amount of one input and the output attained. Both the input
(denominator) and the output (numerator) can be either in unit or in dollar
amount.
Total productivity measures the relationship between the output and the total
cost of all the required input resources to produce the output. The output
(numerator) can be in unit or sales value of the output manufactured. However,
the input (denominator) is in dollar amount (cost of the input resources).
16-6 Financial productivity contains more information only in the sense that it
facilitates comparisons of different resources.
A financial productivity, however, can be confusing or less useful to production
departments because it includes the cost of resources in computing productivity.
The costs of resources are usually beyond the control of the production, different
cost may be measured differently, or cost of the same resource may be
determined differently in different periods. As a result, differences in financial
productivities might be a result of factors other than improved or deteriorated
productivities in using one or more production resources.
16-7 To say that a total productivity measure encompasses all partial productivity
measures is a misnomer. A total productivity measure may not examine the same
aspects of an operation as a partial productivity measure does. Information
revealed by a total productivity measure cannot be gleaned by examining all the
partial productivity measures for the same operation.
16-8 The primary purpose of calculating productivity is to improve the operation.

Improvements on high-value-added activities decrease costs of the activities
and/or improve the value of the output. Low-valued-added activities should be
eliminated, not improved.
16-9 Manufacturing personnel often prefer operational productivity measures to

financial productivity measures because data for computing operational
productivity measures are either results of activities of the operating department
or resources consumed for these activities. Financial productivity measures
include costs of resources that often are results of activities by personnel outside
of manufacturing functions.
16-10 Measurements of productivity help managers to improve operations of both JIT

and non-JIT firms. However, a JIT firm is more likely to have less low-value-
added activities than a non-JIT firm. Thus, the effect of activity productivity
measures can readily be seen in a JIT firm.
16-2
16-11 (b). (a) is false because a higher productivity would be reflected by a higher, not
lower, partial productivity ratio. (c) is false because an operational partial
productivity measures only in physical unit. (d) is false because a partial
productivity measures the productivity of one, not multiple, input resource.
16-12 Measures for assessing marketing effectiveness include market share, market
size, selling price, sales mix, and sales quantity variances.
16-13 The components of sales variance include selling price and sales volume
variances. A sales volume variance is the total of sales quantity and sales mix
variances. A sales quantity variance can be further separated into market share
and market size variances.
16-14 A selling price variance measures the effects of deviations in actual selling prices
from the budgeted selling prices on operating results, including effects on
contribution margins and operating income. A sales volume variance measures
the effects on operating results, including effects on contribution margins and
operating income, when the number of units of one or more products sold differs
from the budgeted units of the product in the master budget of the period.
16-15 A sales volume variance is the difference between the flexible budget for the
units sold during a period and the budgeted units in the master budget of the
period. For a firm with multiple products the sales volume variance can be the
result of both sales mix and sales quantity variances. The sales volume variance
also is the sales quantity variance for a firm with only a single product.
The sales quantity variance of a firm with multiple products measures only effects
of changes in units sold from the number of units in the master budget of the
period; it does not include effects of deviations in the mixture of products sold
from the budgeted mix of the products.
However, the sales volume variance is the same as the sales quantity variance
for firms with only a single product.
16-16 This statement is not always true. A multi-product firm can still have an
unfavorable sales volume variance even if it sold more units than the budgeted
amount. The firm can have an unfavorable sales volume variance if it sells more
of less-profitable products and less of more-profitable products. Also, the sales
volume variance can be computed from a prior-to current period analysis as well
as a comparison to the master budget.
16-17 Selling price and sales volume variances are the two major components that
account for the difference between the total sales of a period and the total sales
in the master budget for the period. Sales mix and sales quantity variances are
detailed components of a sales volume variance.
16-3
16-18 A market size variance measures the effect of changes in the size of a product’s
total market on a firm’s total contribution margin or operating income. A market
share variance examines the effect of changes in the firm’s shares of the total
market on its total contribution margin or operating income.
16-19 A firm benefits from a favorable sales quantity variance only if there are no
adverse changes in selling prices or sales mix variances. A favorable sales
quantity variance may not be beneficial to the firm if the firm lowered its selling
prices or sold more of low-priced, low-margin and less of high-priced, high-
margin products.
An increase in the total market size often leads to a favorable sales
quantity variance. Strategically, the favorable sales quantity variance may not be
favorable to the firm if the firm has an unfavorable market share variance.
However, a firm can have a favorable market size variance and an
unfavorable sales quantity variance if the firm sold fewer total units than the
number of units budgeted for the period in a period that the total market
increased. Conversely, the market size variance of a firm can be unfavorable
because the total market contracted and yet the firm experienced a favorable
sales quantity variance from selling more units than the number of units
budgeted for the period.
Relationships between a market share variance and a sales quantity
variance can be in either direction. A firm can have a favorable sales quantity
variance and an unfavorable market share variance when the increase in the
number of units sold is less than the proportional to the increase of the total
market. The sales quantity variance would be unfavorable if a firm sold fewer
units than the budgeted units although the firm experienced a favorable market
share variance when the decrease in the total number of units was less than the
decrease in the total market.
16-20 A sales volume variance can be divided into sales quantity and sales mix
variances. A sales quantity variance can be further divided into market size and
market share variances.
16-21 A firm can increase its earnings through reducing expenses, even if it sold fewer
units – earnings increased with lower sales.
16-4
BRIEF EXERCISES
16-22
d. First, calculate the Sales Mix Ratios:
Actual Budget
Quantity Ratio Quantity Ratio
R66 1,000 .5 1,200 .75
R100 1,000 .5 400 .25
Total 2,000 1 1,600 1.0
R66 sales quantity variance: (2,000 - 1,600) x .75 x $10 = $3,000 F
16-23
c. R100 sales mix variance: (.5 - .25) x 2,000 x $70 = $35,000 F
16-24
e. Total sales volume variance:
R66: (1,000 - 1,200) x $10 = $ 2,000 U
R100 (1,000 - 400) x $70 = 42,000 F
Total $40,000 F
16-25
d.
Market share:
Actual: 3,000 / 100,000 = 3%
Budget: 1,600 / 32,000 = 5%
Market share variance: (3% - 5%) x 100,000 x $25 = $50,000 U
16-5
16-26
d. Market size variance: (100,000 - 32,000) x 5% x $25 =
$85,000 F
16-27
a. Sales volume variance: (3,000 - 1,600) x $25 = $35,000 F
16-28
c.
Operational Partial Productivity = Actual Production/Actual Input

= 9,500/8,950
= 1.06
16-6
EXERCISES
16-29 Financial Partial Productivity and Total Productivity (20 min)

1. Financial partial productivity:
2009 2010
(1) Output 400,000 486,000
(2) Direct materials:
Quantity 160 180
Unit cost x 3,375 x $3,125
Total direct materials cost $540,000 $562,500
(3) DM financial partial productivity (1) / (2) 0.7407 0.8640
(4) Direct labor:
Hours used 10,000 13,500
Hourly wage x $26 x $25
Total direct labor cost $260,000 $337,500
(5) DL financial partial productivity (1) / (4) 1.5385 1.4400
2. Total productivity:
2009 2010
(1) Output 400,000 486,000
Total cost:
Direct materials cost $540,000 $562,500
Direct labor cost 260,000 337,500
(2) Total cost $800,000 $900,000
(3) Total productivity (1) / (2) 0.5000 0.5400
16-7
Problem 16-29 (continued)
3. The direct labor productivity per direct labor dollar decreased from
1.5385 units of output in 2009 to 1.44 in 2010. The direct materials
productivity, however, improved from manufacturing 0.7407 unit of
output per direct materials dollar in 2009 to 0.864 in 2010. The
decision to increase direct materials productivity (reduce direct
materials waste) at the expense of direct labor productivity is the right
decision. The total productivity improved from 0.5 for each dollar of the
prime cost to 0.54 per dollar.
16-8
16-30 Operational and Financial Partial Productivity (20 min)

1. Operational Partial Productivity: number of calls handled per
engineer
2009: 100,000 /10 = 10,000
2010: 108,000 / 8 = 13,500
2. Financial Partial Productivity
2009: 100,000 /(10 x $45,000) = 0.2222
2010: 108,000 /( 8 x $60,000) = 0.225
3. Hiring of engineers with two years’ experience increased financial
partial productivity slightly. Although the firm paid the experienced
engineers higher salaries, on average each of these engineers was
able to answer more calls than newly graduated engineers.
Experienced engineers are likely to provide better services in
quality and quick response than those provided by new graduates
and customers are likely to be more satisfied with the services the
firm provided when the firm staffed with experienced engineers.
Unfortunately, productivity measures provide no measure on the
quality of services.
4. Among other factors that the firm needs to consider are:

 quality of the service provided
 customer satisfaction
 continuing availability of engineers
 average length of time on the job
 training cost
 need for supervision
16-9
16-31 Sales Performance at Hewlett-Packard (20 min)

This exercise is intended for class discussion, and there are many different
directions the discussions might take. Here are some key points, and a
report about what the CEO actually did.
Points for CEO Hurd to consider:
1. is H-P measuring the key drivers of sales performance?
o customer satisfaction
o customer profitability (see chapter 5)
o the effects of product price changes, mix changes, and quantity
changes; this is particularly important for H-P due to its
relatively recent merger with Compaq computer and the
resulting increased complexity of product offerings and sales
staff relationships
o an analysis of market share and market size by key product
line; H-P competes in business where there is strong
competition from Dell, Canon, and other manufactures of
computer peripherals.
What CEO Mark Hurd did:

o streamlined the sales force by removing layers, and allowing
quicker response to customer questions and requests
o tied sales commissions to the profitability of the products sold
rather than total sales value, to provide a direct incentive for
sales people to identify and to sell the most profitable products
o increased the time sales people were with customers, while
reducing and streamlining the administrative process of in-office
meetings and reports
o sales people would be responsible for selling a smaller range of
products; previously they had been responsible for a wide
range of products
o the sales staff had worked with as many as 30 different
software systems, that were used throughout the company;
this was simplified by having the sales people responsible to
business units, rather than selling the broad range of H-P
products
16-10
Source: Pui-Wing Tam, “Hurd’s Big Challenge at H-P: Overhauling

Corporate Sales,” The Wall Street Journal, April 3, 2006, p 1.
16-11
16-32 Productivity: Which Way to Lean? (15 min)
1. Productivity measures can help a company become more efficient

by providing key measures that the company can track on a
frequent basis to monitor efficiency. The productivity measures
can also be benchmarked against other firms of industry averages
to provide a guide for further improvements in efficiency.
2. The Toyota Production System (TPS) is a system designed to

reduce waste and improve quality in manufacturing. The main elements
of TPS are:
(1) a long term focus on relationships with suppliers, and
coordination with these suppliers,
(2) an emphasis on balanced, continuous flow manufacturing, with
stable production levels,
(3) continuous improvement in product design and manufacturing
processes with the objective of eliminating waste, and over-
production, and
(4) flexible manufacturing systems in which different products are
produced on the same assembly line and employees are trained
for a variety of tasks.
For additional resources on lean manufacturing and lean accounting, see

two Statements on Management Accounting by the Institute of
Management Accountants: Frances A. Kennedy and Brian H. Maskell,
“Accounting for the Lean Enterprise: Major Changes to the Accounting
Paradigm,” and Frances A Kennedy and Brian H. Maskell, “Lean Enterprise
Fundamentals”; at http://www.imanet.org/publications_statements.asp
16-12
16-33 Sales Volume, Sales Quantity, and Sales Mix Variances (30 min)
1. Sales Mix
Total Seats Budgeted Sales Actual Sales
Available % Quantity Mix % Quantity Mix
Center 2,000 x .8 = 1,600 .2500 .95 1,900 .3028
Side 2,500 x .9 = 2,250 .3516 .85 2,125 .3386
Balcony 3,000 x .85 = 2,550 .3984 .75 2,250 .3586
Total 6,400 1.00 6,275 1.00
2. Budgeted Average Contribution Margin

Number Contribution Total Contribution
of Seats Margin per Unit Margin
Center 1,600 x $60 = $ 96,000
Side 2,250 x $50 = 112,500
Balcony 2,550 x $40 = 102,000
Total 6,400 $310,500
Budgeted average contribution margin per unit:

$310,500  6,400 = $48.516
16-13
16-33 (continued -1)
3. Sales Mix and Sales Quantity Variances
4. Total Sales Volume Variances
16-14
16-34 Quality and Productivity (20 min)
This question is intended for class discussion. The objective is to try to

balance the strategic success factors within an automotive company. The
answers are likely to vary. Here are some points to bring out in the
discussion:
In the longer term, a car’s success in the market is determined by its
acceptance by the customer, not productivity. This means attention
to quality and design. The car must satisfy the customers’
expectations for quality, functionality, performance, and appearance.
Productivity is a key measure of a firms’ ability to generate short and
long-term profits, but those profits will not be forthcoming if the
customers are not attracted to the firm’s products.
The key role for productivity is to provide, over the long term, the
resources that are necessary for the automaker to invest in product
design, customer service, and quality. Productivity can provide these
resources by reducing the amount of time and dollars required in
manufacturing, thus making these funds available for other purposes.
 As noted in chapter 17, the cost of quality can be quite high, when
warranty costs and rework costs are considered. Thus, the savings
from productivity should be considered within the context of the cost
of quality
The Toyota Production System is a good model of a system that is
designed to achieve both quality and productivity
Useful reading on this matter: Dan Slater, “In the Race for Success,
Quality is More Important than Productivity,” Manufacturing & Technology
News (www.manufacturingnews.com/news/editorials/slater.html ). See
also, Matthew Boyle, “Cutting Costs Without Cutting Jobs,” Business
Week, March 9, 2009, p 55.
16-15
16-35 Productivity and the Economy (20 min)
This question is intended for class discussion. Answers are likely to vary.
Here are some points that could be brought up in the discussion.
It is clear from the BLS predictions and preliminary quarterly measures for
2008 that the rate of productivity increase has fallen from the levels of the
prior few years. Some would argue that the very high rates in 2002 and
the few years thereafter were the result of significant belt-tightening by
firms in reaction to the market downturn of 2000-2001. The laid-off workers
were rehired only after businesses were comfortable about the growth in
the economy. Some economists view this as a natural part of the business
cycle.
The decline in investment in both capital expenditures and information

technology in 2008 suggests that productivity growth will be reduced
somewhat in the coming few years. However, others note that investment
in information technology can take several years to affect productivity, so
that the recent investments may carry forward for several years beyond
2008.
A key question is how the current (late 2008) economic downturn will affect
hiring and employment levels. If the period of 2000-2001 is a guide,
significant employment reductions will have the affect of boosting
productivity to some degree.
Useful sources: “America’s Productivity Growth Has Slowed; Does that

Matter?” The Economist, April 16, 2007; “Not Dead, Just Resting,” The
Economist, October 11, 2008, p 18
16-16
16-36 Alternative Measures of Productivity (20 min)
The measure based on manufacturing capacity utilization has a meaningful

interpretation in the sense that it captures the rate of utilization of invested
dollars. It ties in very well with the concept of return on assets (net income
over total assets), a key measure of business performance that is covered
in chapter 19. Managers and investors would like to see high return on
assets and high utilization of capacity. So this measure of productivity is
useful for examining the extent to which the firm is deriving benefit from its
investment in plant and equipment. A related measure, asset turnover, is
also covered in chapter 19. Asset turnover is the ratio of total sales to
average total assets; it is also a measure of the productivity in the use of
the firm’s assets.
Productivity as measured by output/input, as developed in this chapter is

typically focused on the labor force and labor productivity. Total financial
productivity also measures the output relative to total cost. These
measures are more controllable by managers since some portion of
manufacturing costs can be controlled in the short term. As such, it is a
more useful measure of operational level performance. The measure of
capacity level utilization is a productivity measure with a longer term focus,
and is more appropriate for management level control.
Source: Kaj Grichnik and Conrad Winkler, Make or Break: How

Manufacturers Can Leap from Decline to Revitalization, McGraw-Hill,
2008, pp17-20.
16-17
16-37 Productivity Measures for Call Centers (20 min)
The measure proposed, number of calls/number of hours, is a common

and intuitive measure of productivity. The management of the call center
could track this productivity over time to (1) assess the productivity of the
call center staff (how long it takes to respond to a call) and (2) the overall
capacity in the call center (are we overstaffed?). A problem with the
measure is that one goal of the call center is to produce satisfied customers
by taking the time necessary to explain how to use the product or to answer
any problems or questions they have. This type of customer service will
build brand loyalty which is a key to overall profitability, as we noted in the
section on customer profitability analysis in chapter 5. Thus, multiple
measures of performance are likely to be useful for call centers, including
direct measures of customer satisfaction. This could be done by having a
manager call back a sample of the users of the call center and ask for their
feedback about the service they received. This type of feedback could also
be requested via email. The measure of productivity itself will not answer
the key question: how satisfied is the customer with the service received?
Reference: Felix Barber and Rainer Strack, “The Surprising Economics of

a ‘People Business’, ” Harvard Business Review, June 2005, pp 81-90.
16-18
16-38 Sales Mix and Quantity Variances (20 min)
1. Contribution Income Statement for Hathaway
2. The volume variances for each product are shown above:

In Sales Dollars:
Starlight: $3,500 (U) = (.2x 12,000 - .25 x 10,000) x $35
Moonlight: $189,000 (F) = (.80 x 12,000 - .75 x 10,000) x $90
In Contribution Margin
Starlight: $1,300 (U) = (.2x 12,000 - .25 x 10,000) x ($35-$22)
Moonlight: $88,200(F) = (.80 x 12,000 - .75 x 10,000) x ($90-$48)
3. The mix and quantity variances for each product are shown below;
note that the total of the sales mix and quantity variance equals the volume
variance
Sales Mix Sales Quantity Volume

Contribution Margin Variance Variance Variance
Starlight $ (7,800) $ 6,500 $ (1,300)
Moonlight 25,200 63,000 88,200
Total $ 17,400 $ 69,500 $ 86,900
Sales Mix Variances

Starlight: $7,800 (U) = (.2 - .25) x 12,000 x ($35 - $22)
Moonlight $25,200 (F) = (.8-.75) x 12,000 x ($90-$48)
Sales Quantity Variances
Starlight: $6,500 (F) = (12,000 – 10,000) x .25 x ($35 - $22)
Moonlight $63,000 (F) = (12,000 – 10,000) x .75 x ($90-$48)
16-19
PROBLEMS
16-39 Operational Partial Productivity (15 min)

1. Operational Partial Productivity
2010 2009
DM 500,000 / 800,000 = 0.625/unit 600,000 / 825,000 = 0.727/unit
DL 500,000 / 150,000 = 3.333/hr 600,000 / 200,000 = 3.0/hr
2. Productivity of direct material, CSU10, deteriorated from 0.727 in

2009 to 0.625 in 2010. Productivity of direct labor, however,
improved from 3 units per hour in 2009 to 3.333 units per hour in
2010, even though the hourly wage rates decreased from $63 to
$56.
16-20
16-40 Partial Financial Productivity (30 min)

1.,2.,3. See spreadsheet solution below:
16-21
16-40 (continued-1)
1.
2.
Direct material productivity deteriorated from .005387 in 2009 to .004006
in 2010. Direct labor improved from .047619 in 2009 to .059524 in 2010.
3.
The partial financial productivity ratios are calculated and compared in the
speadsheet above.
4. The decompositions suggest that changes in financial productivity from

2009 to 2010 can be attributed to unfavorable direct materials
productivity and price variance, offset by favorable productivity and
rate variance for direct labor.
16-22
16-41 Total Productivity (15 min)

1. Total productivity in units
2010 2009
(a) Total units manufactured: 500,000 600,000
(b) Total variable manufacturing
costs incurred: $133,200,000 $123,975,000
(Total variable manufacturing costs are calculated in solution for 16-40)
(c) Total productivity: (a) / (b) 0.0037537 0.0048396

(d) Change in productivity:
0.0037537 - 0.0048396 = 0.001086 U
2. Financial partial productivity measures indicate that the changes in

productivity for direct materials and direct labor are in opposite
directions. The firm improved its direct labor productivity while its direct
materials productivity deteriorated. The total productivity change
suggests that the deterioration in direct material productivity is more
than the productivity improvements in direct labor. The total productivity
has deteriorated.
16-23
16-42 Operational and Financial Partial Productivity (45 min)

1. Simpson Company
Comparative Income Statement
For the years 2009 and 2010
2010 2009
Sales 18,000 x $40 = $720,000 15,000 x $40 =$600,000
Variable cost of sales:
Materials 12,600 x $10 = $126,000 12,000 x $8 = $96,000
Labor 5,000 x $25 = 125,000 6,000 x $20 = 120,000
Power 2,000 x $2 = 4,000 1,000 x $2 = 2,000
Total variable costs of sales $255,000 $218,000
Contribution margin $465,000 $382,000
Change in profits from 2009 to 2010: $465,000 - $382,000 =

$83,000 increase
2.3., See spreadsheet on following sheet.
4. Both direct materials and direct labor operational partial productivity

improved from 2009 to 2010. In 2010 the firm was able to manufacture
more output for each unit of materials placed into production and for
each hour used in production. The operational productivity of power in
2010 deteriorated from 2009. It is posible that the firm used more
equipment in production in 2010 which reduced consumption of
materials and production hours.
The financial partial productivity for both direct materials and power
deteriorated from 2009 to 2010. Increases in direct materials costs were
more than the improvements in operational partial productivity for direct
materials. AS for the operational partial productivity, the financial partial
productivity for direct labor also improved. The extent of improvements,
however, is much lower in financial partial productivity. The direct labor
operational partial productivity improved 44 percent in 2010 over 2009.
The financial partial productivity, however, improved only 15.2 percent
between the two years. The decrease in financial partial productivity is
likely a result of increased direct labor wage rates.
16-24
16-25
5. See spreadsheet above in part 2. And 3.
6. Productivity for both direct materials and direct labor improved in 2010.
The percentages of improvements in productivity are 11.43
(=.017857/.15625) and 35.2 (=.044/.125) for direct materials and
direct labor, respectively, of the 2009 productivity. However, cost
increases in direct materials and direct labor reduced the gains in
productivity on these two manufacturing factors.
16-26
16-43 Comparative Income Statements and Sales Performance

Variances; Current to Prior Year (35 min)
1. Comparative Income Statement for 2010 based on the flexible

budget (Exhibit 16.15)
The calculations for the volume and selling price variances are shown
below.
The volume variances for each product:

Half Inch: $13,200 (F) = (.3 x 6,500 - .5 x 7,200) x ($14-$6)
One Inch: $22,800 (U) = (.7 x 6,500 - .5 x 7,200) x ($32-$8)
The selling price variances are as follows:

Half Inch: $7,200 (U) = (.5 x 7,200) x ($14-$12)
One Inch: $14,400 (F) = (.5 x 7,200) x ($36-$32)
16-27
2. The sales mix and quantity variances based on contribution margin are
shown below.
Sales Mix Variances

Half-inch: $11,520 (F) = (.5 - .3) x 7,200 x ($14 - $6)
One-inch $34,560 (U) = (.5-.7) x 7,200 x ($32 - $8)
Half-inch: $1,680 (F) = (7,200 – 6,500) x .3 x ($14 - $6)
One-inch $11,760 (F) = (7,200 – 6,500) x .7 x ($32 - $8)
3.
The sales strategy of decreasing price on the half-inch model was a
success in sales volume as sales units increased from 1,950 (.3 x 6,500)
to 3,600 (.5 x 7,200), an increase of 1,650 units. The selling price
variance was unfavorable because of the price change, a loss of $7,200
( = $2 price change x 3,600 units), but the sales volume variance for the
product, based on sales, was favorable, at $23,100 (=1,650 units x $14),
for a net positive effect on sales for the half-inch model of $23,100 -
$7,200 = $15,900.
The strategy of increasing price on the one-inch model could have

caused the fall in sales of 950 units (.7 x 6,500 - .5 x 7,200) but it
produced a favorable selling price variance of $14,400, with an
unfavorable sales volume variance of $30,400 (=950 x $32), based on
sales, for a net reduction of $16,000 in sales dollars.
The cost of the increased sales volume on variable costs was $9,900 =
1,650 x $6 for the increased sales of the half inch model. The reduced
variable costs because of the reduced sales of the one-inch model was
950 x $8 = $7,600.
The net effect on operating income of the sales strategies was
unfavorable at $2,400 = $89,800 - $87,400. The net improvement in
the half-inch model of $6,000 (=$13,200 - $7,200) was offset by the loss
of $8,400 (=$22,800-$14,400) on the one-inch model.
16-28
16-44 Operational and Financial Partial and Total Productivity (30

min)
1. Operational Partial Productivity

MF LI Difference
DM 20,000 / 300,000 = 0.0667 20,000 /200,000 = 0.1 0.0333 F*
DL 20,000 / 100,000 = 0.2 20,000/120,000= 0.1667 0.0333 U
* The direction of variances denotes the advantage of LI over MF.

It is not clear which is the better of the two approaches. The operational
partial productivity shows that LI has a higher productivity in direct
materials while MF yields a higher direct labor productivity.
2. Manufacturing Cost
MF LI
DM 300,000 x $ 8 = $2,400,000 200,000 x $ 8 = $1,600,000
DL 100,000 x $25 = 2,500,000 120,000 x $25 = 3,000,000
Total $4,900,000 $4,600,000
Financial Partial Productivity

MF LI Difference
DM 20,000 /$2,400,000 = 0.0083 20,000/$1,600,000=0.0125 .0042 F
DL 20,000 /$2,500,000 = 0.008 20,000/$3,000,000=0.0067 .0013 U
The financial partial productivity also shows mixed results. There is not a
clear advantage of one manufacturing alternative over the other.
3. Total Productivity
MF: 20,000 /$4,900,000 = 0.0041
LI: 20,000 /$4,600,000 = 0.0043
The total productivity shows that LI has a slight advantage over MF.
16-29
16-45 Direct Labor Variances, Productivity Measures, and Standard

Costs (30 min)
1. Assembly Department Direct Labor Variances

2009:
Total actual direct labor hours: 25 x 20,000 = 500,000
Total standard direct labor hours: 24 x 20,000 = 480,000
$30 x 500,000 $28 x 500,000 $28 x 480,000

= $15,000,000 = $14,000,000 = $13,440,000
Rate variance Efficiency variance

= $1,000,000 U = $560,000 U
2010:
$36 x 400,000 $35 x 400,000 $35 x 420,000

= $14,400,000 = $14,000,000 = $14,700,000

= $400,000 U = $700,000 F
Testing Department Direct Labor Variances

2009:
$20 x 240,000 $21 x 240,000 $21 x 280,000

= $4,800,000 = $5,040,000 = $5,880,000

= $240,000 F = $840,000 F
16-30
2010:
$24 x 200,000 $25 x 200,000 $25 x 220,000

= $4,800,000 = $5,000,000 = $5,500,000

= $200,000 F = $500,000 F
Recap:
Assembly Department Testing Department
2009 2010 2009 2010
Rate variance $1,000,000 U $400,000 U $240,000 F $200,000 F

Efficiency variance $ 560,000 U $700,000 F $840,000 F $500,000 F
2. Assembly Department Operational Partial Productivity

2009:20,000 / 500,000 = 0.04
2010:20,000 / 400,000 = 0.05
Testing Department Operational Partial Productivity

2009:20,000 / 240,000 = 0.0833
2010:20,000 / 200,000 = 0.1
3. Assembly Department Financial Partial Productivity

2009:20,000 / $15,000,000 = 0.001333
2010:20,000 / $14,400,000 = 0.001389
Testing Department Financial Partial Productivity

2009:20,000 / $4,800,000 = 0.004167
2010:20,000 / $4,800,000 = 0.004167
16-31
4. Recap:
Operational partial productivity
2009 2010 Change
Assembly 0.04 0.05 0.01 F
Testing 0.0833 0.1 0.0167 F
Financial partial productivity

Assembly 0.001333 0.001389 0.000056F
Testing 0.004167 0.004167 -0-
Operational partial productivity improved in both departments from

2009 to 2010. The financial partial productivity in the Assembly also
improved while the Testing remained unchanged.
5. The standards in a standard costing system often are determined

independently and incorporate changes in operating factors. The
standard for the operation of a year may change because of changes in,
for example, technology, quality of materials, experience of production
workers, designs, or processes.
Productivity measures use as the criterion the productivity of a prior
year without adjusting for changes occurred or the expected changes for
the current year. As a result, assessments of productivity may depict an
entirely different picture than those of variance analyses in a standard
costing system.
16-32
16-46 Comparative Income Statements and Sales Performance

Variances; Current to Prior Year (25 min)
1.
The selling price variances and volume variances based on

contribution are summarized as follows:
Sales Price Sales Volume

Sales Variance Variance
Quality $ (132,000) $ 44,000
Heavy Duty (297,000) (121,000)
Total $ (429,000) $ (77,000)
16-33
Problem 16-46 (continued -1)
2. Sales mix and quantity variances
Sales Mix Sales Quantity Volume

Contribution Margin Variance Variance Variance
Quality $ 44,000 $ - $ 44,000
Heavy Duty (121,000) - (121,000)
Total $ (77,000) $ - $ (77,000)
Sales Mix Variances

Quality: $44,000 (F) = (.4 - .3333) x 3,300 x ($1,000 - 800) [rounded,
using four decimal places for 1/3 = .3333]
Heavy Duty: $121,000 (U) = (.6 - .6667) x 3,300 x ($1,500 - $950)
[rounded, as above for the variance for Quality]
The sales quantity variance is zero for both products since there was no
change in total sales units.
3. As expected, there were significant losses reflected in the large selling

price variances, a total unfavorable variance of $429,000. There was a
large unfavorable volume variance as well, an unfavorable variance of
$77,000, which is due entirely to the change in product mix, since there
was no change in sales quantity. Note that the volume variance is a
combination of the mix and quantity variances. There was a favorable mix
variance for the Quality product of $44,000 due to its increase from 1/3 to
40% of total sales. However, there was also an unfavorable mix variance
of $121,000 for the Heavy Duty product because of its decline in the mix
from 2/3 to 60%. Unfortunately for Lawn Master, the Quality product has
a lower contribution margin of $200 ($1,000 - $800) relative to the
contribution on the Heavy Duty product, which has a contribution margin of
$550 ($1,500 - $950). So the firm lost high margin sales and increased
low margin sales. Management should attempt to understand the reason
for this unexpected result. Perhaps the advertising was done so that it
drew attention to the Quality product. Or alternatively, the lowering of
prices for both products brought greater attention to the Quality product, the
lower priced product. Since the Heavy Duty product is likely to continue to
have higher margins, this trend in sales is a concern for the company.
16-34
Problem 16-46 (continued -2)
4.The decrease in profit from $880,000 to $224,000 from 2009 to 2010 is a

major concern. As indicated in the problem, the firm is starting to study
ways to reduce variable costs for the coming year. A useful way to start
this planning is to use target costing and continuous improvement, as
explained in chapter 13. Target costing looks at ways to redesign the
product or manufacturing process to reduce manufacturing costs. This
involves in part examining the product features and changing the features
offered in the products to better match customers’ expectations. For
example, expensive features that are not in much demand by customers
should be deleted or redesigned, while features that are much desired by
customers and are relatively low cost to manufacture should be added.
Another approach would be to use the productivity analyses introduced in

this chapter to determine financial and operational partial productivity
measures for the key manufacturing cost factors, and to monitor these
measures to seek improvement.
Another approach a student might suggest is to use ABC costing to better

understand the drivers of indirect costs. However, note that total fixed
costs are a relatively small portion of total manufacturing costs in this case
($550,000/3,300 = $167 per unit).
Finally, standard costing and the flexible budget as explained in chapter 14

would be an approach to consider. Standard costing sets standard usage
and prices for the key manufacturing inputs, and determines variances from
these inputs. The six variable cost variances are usage and price for
materials, usage and rate for labor, and usage and spending variances for
variable overhead.
16-35
16-47 Productivity and Market Share in the Auto Industry; Internet

Exercise (20 min)
1. The total productivity for the auto makers is shown below for the most
recent year at the time of the question was prepared, 2007. Also, while not
required, the results for 2005 are also shown for comparison. (Chrysler
LLP is excluded; since 2006 it is a private company and its financial
statements are not publicly available):
The objective of this question is to make the students aware that total
productivity can be at least approximated for a company the student is
interested in by obtaining basic financial data from the firm’s annual report.
Note there are no significant differences between the auto makers or

between the productivity measures for 2005 and 2007. Note that this is in
contrast to the Harbour Report data on auto firm productivity, cited in
Problem 16-34 which reports an increase in productivity (measured as
labor hours per vehicle) for Ford. The two measures of productivity do not
measure the same thing, so that these differences arise.
While the measures computed here are limited by the amount of
information available, they can provide a starting point for looking at other
measures of performance, and looking for more detailed information about
product cost. For example, it would be useful to consider how these
measures differ across the different manufacturing plants for the auto
makers, across product division, and geographical divisions. For example,
Ford’s 2005 annual report includes an analysis of “cost performance” which
showed that costs increased from 2004 to 2005 in the following categories
(in billions of dollars):
16-36
6-47 (continued -1)

Increase (decrease)
Supplier related cost $1
Pension and health care .8
Warranty costs .4
Depreciation and amortization (investments
in new equipment and faster depreciation) .3
Overhead (reduction in salaried personnel) (.3)
Manufacturing (reduction in personnel and
improvements in efficiency) (.9)
Total increase in cost 1.3
2. This requirement can be assigned for class discussion, and answers will
likely vary, depending on what portion of the financial statement is used
and which year’s annual report is used. The discussion here can focus on
some of the following (all these points are based on the 2007 and 2005
annual reports of GM and Ford)
Alternatively, the instructor can assign requirement 1 only, and then discuss
some of the observations about requirement 2, as noted below.
 some firms will be improving market share in some markets and

losing in others; for example Ford lost market share in the U.S from
18% in 2004 to 17% in 2005, while gaining market share in Brazil
from 11.8% to 12.4% during the same period
 Ford’s 2007 annual report shows the U.S. market share of the leading
automakers.
16-37
16-48 Productivity and Ethics (15 min)
1. The operational partial productivity deteriorates slightly from

0.0051 in 2009 (500/99,000) to 0.005 in 2010 (560/112,000).
Manipulating accounting numbers in order to show a desirable
result is an unethical behavior regardless the intention.
2. Tomas should not follow the order without following a consistent

accounting method. If the firm believes that certain cost items
should be reclassified as indirect costs, the same procedure
should be followed for all years. Tomas should then go back and
revise operating results of previous years.
16-38
16-49 Market Size, Market Share, Working Backward (30 min)

1. Budget weighted average contribution margin (BWACM)
Market Share Variance = Difference in market shares x
Total actual market size x BWACM
$96,000 U = 4% x 4,000,000 x BWACM
BWACM = $0.60
2. Budget and actual market shares

Market Size Variance = Difference in market sizes x
Budget market share x BWACM
$126,000 F = ($4,000,000 - $2,500,000) x Budget Market Share x $0.6
Budget Market Share = 14%
An unfavorable market share variance is a result of having a smaller
actual market share than the budgeted market share.
Actual Market Share = 14% - 4% = 10%
3. Budget and actual total units of sales
Budget total units of sales = Budgeted total market size x
budgeted market share
= 2,500,000 x 14%
= 350,000
Total units sold = Actual total market size x Actual market share
= 4,000,000 x 10%
= 400,000
16-39

4. Fishwich sales quantity variance
Total sales quantity variances (all products)
= Market share variance + Market size variance
= $96,000 U + $126,000 F
= $30,000 F
Fishwich sales quantity variance

= Total sales quantity variance - (Hamburger sales quantity variance
- Cheeseburger sales quantity variance)
= $30,000 F - ($14,000 F + $15,000 F)
= $1,000 F
5. Budget contribution margin of each of the products

Budget sales mixes: Hamburger 4/8 or 0.5
Cheeseburger 3/8 or 0.375
Fishwich 1/8 or 0.125
Sales quantity variance of a product
= Difference in total sales quantities for all products x Budgeted
sales mix of the product x Budgeted contribution margin of the
product
Sales quantity variance - Hamburger:
$14,000 F = (400,000 - 350,000) x 0.5 x Budget CM Hamburger
Budget CM Hamburger = $0.56
Sales quantity variance - Cheeseburger:
$15,000 F = (400,000 - 350,000) x 0.375 x Budget CM Cheeseburger
Budget CM Cheeseburger = $0.8
Sales quantity variance - Fishwich
$1,000 F = (400,000 - 350,000) x 0.125 x Budget CM Fishwich
Budget CM Fishwich = $0.16
16-40

6. Actual sales mix of each of the products
Sales mix variance of a product
= Difference in sales mix of the product x Total units sold for all
products x Budgeted contribution margin per unit of the product
Hamburger:
$2,240 U = (Actual Sales Mix Hamburger - 0.5) x 400,000 x $.56
Actual Sales Mix Hamburger - 0.5 = -0.01
Actual Sales Mix Hamburger = 0.49
Cheeseburger:
$4,800 U = (Actual Sales Mix Cheeseburger - 0.375) x 400,000 x $.8
Actual Sales Mix Cheeseburger - 0.375 = -0.015
Actual Sales Mix Cheeseburger = 0.36
Fishwich:
$1,600 F = (Actual Sales Mix Fishwich - 0.125) x 400,000 x $.16
Actual Sales Mix Fishwich - 0.125 = 0.025
Actual Sales Mix Fishwich = 0.15
7. Budget and actual units sold for each of the products

Budget Sales Units
Budgeted Total Unit Budgeted Sales Mix Budgeted Sales
Units
Hamburger 350,000 x .5 = 175,000
Cheeseburger 350,000 x .375 = 131,250
Fishwich 350,000 x .125 = 43,750
Total Budget Units 350,000
Actual Sales Units
Total Actual Unit Actual Sales Mix Actual Sales
Units
Hamburger 400,000 x .49 = 196,000
Cheeseburger 400,000 x .36 = 144,000
Fishwich 400,000 x .15 = 60,000
Total Actual Units 400,000
16-41
16-50 Flexible Budget, Sales Volume, Sales Mix, and Sales

Quantity Variances (40 min)
1.
Summary of Variances, as calculated above (negative is unfavorable,

positive is favorable):
16-42
2.
The reconciliation of the selling price, variable cost, and flexible cost
variances is as follows. The variances are in the solution shown in part 1.
A negative selling price variance means an unfavorable variance and a
positive is favorable. A negative variable cost variance means a favorable
variance and a positive is unfavorable.
16-43
16-51 Flexible Budget, Sales Volume, Sales Mix, and Sales Quantity
Variances (30 min)
1.
The
solution is summarized below, and the calculations are shown above (a
negative is unfavorable and a positive is favorable):
16-44
16-45
16.51continued -1)
2.
MEMO
TO: Jerry Tanner, CEO
FROM: I M Student
RE: Tanner Company Variance Analysis
The following information describes the results of variances

calculated on the attached spreadsheet (see requirement 1) with regard
to what was planned for 2010 and the actual results reported.
The firm has a favorable sales volume variance for H20 and a
unfavorable sales volume variance for G80. Tanner was able to sell
more units of H20 while the sales volume for G80 was less than the
budgeted level. The total sales quantity of the firm for both products has
increased. The increase, however, is from sales of H20. Both sales
quantity and sales mix variances support this conclusion. It appears that
the market is favorably receptive to H20 while somewhat unreceptive to
G80. This is true even though the price of H20 was greater than
budgeted. The firm should find out the reason for enjoying competitive
advantage in H20 and investigate the reasons for unfavorable sales
volumes of G80.
The flexible budget variance is unfavorable for G80 because of a
simultaneous decrease in sales price and increase in variable cost. The
reverse is true for H20 which enjoyed an increase in both selling price
and decrease in variable costs.
Please contact me for further discussion.
16-46
16-52 Market Size and Market Share Variances (20 min)
1. Product A Product B Total

Budgeted sales unit 30,000 60,000 90,000
Budgeted contribution margin per unit x $ 4.00 x $ 10.00
Budgeted total contribution margin $120,000 $600,000 $720,000
Budgeted average contribution margin per unit $ 8.00
2. Product A Product B Total

Actual units sold 35,000 65,000
Budgets sales unit - 30,000 - 60,000
Differences in sales units 5,000 5,000
Budgeted CM per unit x $ 4.00 x $ 10.00
Sales volume CM variance $20,000 F $50,000 F $70,000 F
3. Sales mix for Products A and B:

Budgeted Actual
Unit % Unit %
Product A 30,000 1/3 35,000 35
Product B 60,000 2/3 65,000 65
TOTAL 90,000 100 100,000 100
Sales mix contribution margin variance:

Product A: (.35 - .333) x 100,000 x $4 = $ 6,800 F
Product B: (.65 - .667) x 100,000 x $10 = 17,000 U
Total sales mix contribution margin variance $10,200 U
16-47

4. Sales quantity contribution margin variance:
Product A: (100,000 - 90,000) x .333 x $4 = $13,320 F
Product B: (100,000 - 90,000) x .667 x $10 = 66,700 F
Total sales quantity CM variance $80,020 F
5. Weighted average budget contribution margin per unit: $8.00 (calculated

in #1)
Market size contribution margin variance:
(2,000,000 - 1,500,000) x (90,000/1,500,000) x $8 = $240,000 F
6. Market share contribution margin variance:

(100,000/2,000,000 - 90,000/1,500,000) x 2,000,000 x 8 = $160,000 U
7. Flexible budget contribution margin variance:

CM
Flexible
Total Contribution Margin Budget
Actual Operating Result Flexible Budget Variance
Product A 35,000 x $3 = $105,000 35,000 x $4 = $140,000 $ 35,000 U
Product B 65,000 x $12 = $780,000 65,000 x $10 = 650,000 $130,000 F
TOTAL $885,000 $790,000 $ 95,000 F
8. Total contribution margin price variance (given) $50,000 F

Selling price variance:
Product A: ($12 - $10) x 35,000 = $70,000 F
Product B: ($24 - $25) x 65,000 = $65,000 U
Total Selling price variance - 5,000 F
Total variable cost price variance $45,000 F
9. Total flexible budget contribution margin variance $95,000 F

Total contribution margin price variance (given) - 50,000 F
Total variable cost efficiency variance $45,000 F
16-48
Sales Mix
Budget Actual
Flavor Quantity Mix Quantity Mix
Vanilla 250,000 .3125 180,000 .18750
Chocolate 300,000 .3750 270,000 .28125
Strawberry 200,000 .2500 330,000 .34375
Anchovy 50,000 .0625 180,000 .18750
Total 800,000 1.00 960,000 1.00
1. a. Sales Volume Variance

Budgeted Sales
Sales Quantity Contribution Volume
Flavor Actual Budget Difference Margin/Unit Variance
Vanilla 180,000 250,000 70,000 x $0.70 = $ 49,000 U
Chocolate 270,000 300,000 30,000 x $0.90 = 27,000 U
Strawberry 330,000 200,000 130,000 x $1.10 = 143,000 F
Anchovy 180,000 50,000 130,000 x $1.50 = 195,000 F
Total 960,000 800,000 $262,000 F
1. b. Sales Mix Variance

Total
Budgeted Sales
Sales Mix Actual CM Mix
Flavor Actual Budget Difference Quantity per Unit Variance
Vanilla .18750 .3125 - .12500 x 960,000 x $ .70 = 84,000 U
Chocolate .28125 .3750 - .09375 x 960,000 x $ .90 = 81,000 U
Strawberry .34375 .2500 .09375 x 960,000 x $1.10 = 99,000 F
Anchovy .18750 .0625 .12500 x 960,000 x $1.50 = 180,000 F
Total 1.00 1.00 $114,000 F
16-49

1. c. Sales Quantity Variance
Budget
Budgeted Sales
Sales Mix Sales CM Quantity
Flavor Actual Budget Difference Mix per Unit Variance
Vanilla 960,000 800,000 160,000 x .3125 x $0.70 = $35,000 F
Chocolate 960,000 800,000 160,000 x .3750 x $0.90 = 54,000 F
Strawberry 960,000 800,000 160,000 x .2500 x $1.10 = 44,000 F
Anchovy 960,000 800,000 160,000 x .0625 x $1.50 = 15,000 F
Total 1.00 $148,000F
Recap
Sales Mix Sales Quantity Sales Volume
Flavor Variance Variance Variance
Vanilla $ 84,000 U + $ 35,000 F = $ 49,000 U
Chocolate 81,000 U + 54,000 F = 27,000 U
Strawberry 99,000 F + 44,000 F = 143,000 F
Anchovy 180,000 F + 15,000 F = 195,000 F
Total $114,000 F + $148,000 F = $262,000 F
2. Overall, the firm has enjoyed a good year. The total sales
substantially exceed the budgeted amount (20%). The increases in
sales could have been a result of the increase of the entire market
size for ice cream and other competing merchandises. In any event,
the firm still had an excellent operation by selling more units of the
flavors with high contribution margins. The favorable sales mix
variances in two of the flavors suggest that the two flavors with high
contribution margins account for all the increases in sales.
16-50
Let m be the proportion of the budgeted matinee shows.

Then, the proportion of the budgeted evening show is 1 – m.
Budgeted Data
(100m x $240) + [100(1 - m) x $600] = $10,000 + $39,200
36,000m = $10,800
Budgeted mix for matinee: m = .3
Budgeted mix for evening show is 1 - .3 = .7
Let ATQ be the actual total number of shows.

Total sales quantity variance:
[(ATQ -100) x .3 x $240] + [(ATQ - 100) x .7 x $600] = -$4,920
Simplifying, 72ATQ - 7,200 + 420ATQ - 42,000 = -4,920
492ATQ = 44,280
Actual total number of shows: ATQ = 90
Let q be the actual total number of evening shows

Then, the actual total number of matinee shows is 1.5q
And, 1.5q + q = 90
Total number of evening shows: q = 36
And the total number of matinee shows is 90 - 36 = 54
1. a. Sales mix variance:

Matinee: (.6 - .3) x 90 x $240 = $ 6,480 F
Evening: (.4 - .7) x 90 x $600 = 16,200 U
Total sales mix variance $9,720 U
1. b. Sales quantity variance:

Matinee: (90 - 100) x .3 x $240 = $ 720 U
Evening: (90 - 100) x .7 x $600 = 4,200 U
Total sales quantity variance $4,920 U
1.c. Sales volume variance:

Matinee: (54 - 30) x $240 = $ 5,760 F
Evening: (36 - 70) x $600 = 20,400 U
Total sales volume variance $14,640 U
16-51
2.
The group performed more matinee shows than the budgeted
amount in both the number of shows and the relative proportion of
the total number of shows the group performed. The evening shows,
which offered a higher contribution margin per show than that of a
matinee, are less than the budgeted amount.
While there are many reasons for the increased popularity of the
matinee including the economy of the area and competition, the
quality of the matinee shows meets the expectation of the audience.
The group, however, needs to improve its evening shows to
differentiate these shows from competitors.
16-52
16-55 Market Size and Market Share Variances (20 min)

Budgeted selling price per mile: $.40 + $.12 = $.52
Selling price variance: ($.48 - $.52) x 69,120,000 =$2,764,800
U
Sales volume variance:
(69,120,000 - 80,000,000) x $.40 = 4,352,000
U
Total operating income variance $7,116,800
U
Total market size

Budgeted total market size: 80,000,000 /.05 = 1,600,000,000
Actual total market size: 1,600,000,000 x .9 = 1,440,000,000
Actual market share: 69,120,000 /1,440,000,000 = 0.048
Market share variance:

(0.048 - 0.05) x 1,440,000,000 x $.40 = $1,152,000 U
Market size variance:
(1,440,000,000 - 1,600,000,000) x .05 x $.40 = 3,200,000 U
Total $4,352,000 U
16-53
16-56 Small Business Market Size and Market Share Variances (15
min)
WS = Welcome Signs; BH= Birdhouses
1. Budget (per month) Actual (per month)____
Diane’s Designs Industry Share Diane’s Designs Industry Share
WS 50 3,000 1.67% 45 3,000 1.5%
BH 25 200 12.5% 35 175 20%
2. Weighted Average Budgeted Contribution Margin Per Unit:

Budgeted contribution margin per unit for both products:
$240  75 = $3.20
Market Share Variance
Welcome Signs: (1.5 – 1.67) X 3,000 X $3.20 = $16.00 U
Birdhouses: (0.2 – 0.125) X 175 X $3.20 = $42.00 F
3.Market size variance

Welcome Signs: (3,000 - 3,000) X 0.1 X $3.20 = $ 0
Birdhouses: (175 - 200) X 0.125 X $3.20 = $10.00 U
4. Diane’s market share for Welcome Signs decreased while she did
very well for Birdhouses. The total market for Birdhouses decreased.
Yet Diane sold more units. Among possible reasons are changes in
quality, price, and seasonal variations.
16-54
16-57 Sales and Variable Cost Variances; Current to Prior Year (25 min)
1. The selling price and volume variances are as follows:
The flexible budget, the center column, is determined as follows:

2010 sales at 2009 prices and unit variable costs
Sales: $1,000,000 = 25,000 x $40

Materials: $400,000 = 25,000 x $16 x 1 units of material/unit of
output
Labor: $500,000 = 25,000 x $10 x 2 hours/unit
Selling price variance: $25,000 = ($41 - $40) x 25,000
Volume Variance
Based on sales dollars: $120,000 = (25,000 – 22,000) x $40
Based on contribution:
= $120,000
Less increase in materials cost
(25,000 – 22,000) x $16 x 1 48,000
Less increase in labor cost
(25,000 – 22,000) x $10 x 2 60,000
Volume variance based on contribution $12,000
16-55
2. The materials usage and price variance and labor usage and rate variance
are computed as follows:
The center column, “Actual Input at Prior Year Rate” is determined as follows:
The actual materials used at the prior year price is determined as follows:
$300,000 = 25,000 x $16 x .75unit of materials/unit produced
The actual labor used at the prior year rate is determined as follows:
$562,500 = 25,000 x $10 X 2.25 hours/unit
The price and rate variances are determined by subtracting the “actual input at
prior year rate” from the actual dollars for 2010. The usage variances are
determined by subtracting the flexible budget from the “actual input at prior
year rate.”
3. First, to recap the $93,250 change in operating income from 2009 to 2010,
an increase from $88,000 to $181,250. The total sales increase is $145,000,
made up of a favorable selling price variance of $25,000 and a favorable sales
volume variance of $120,000, increasing sales from $880,000 in 2009 to
$1,025,000 in 2010. The cost of the additional sales was the additional
variable costs of $108,000 for the additional 3,000 units; materials cost of
$48,000 (3,000 x $16 x 1) and labor of $60,000 (3,000 x $10 x 2). The net
effect, before considering the usage and price variances for labor and
materials, is thus $145,000 - $108,000 = $37,000.
16-56
The price variance for materials is $37,500 (U), reflecting the increase in cost
of materials from $16 to $18. On the other hand, the usage of materials was
favorable, resulting from a per unit usage of ¾ materials units per output in
2010 relative to a one unit of materials per output in 2009: a favorable usage
variance of $100,000 (25,000 x ¼ x $16). The net materials variance was
$62,500 favorable.
The labor rate variance is $56,250 in 2010, reflecting the decrease in the
hourly wage rate from $10 to $9, while the labor usage variance is $62,500
(U) due to the increase in labor from 2 hours per unit to 2.25 hours per unit.
The usage and price variances for materials and labor totaled $56,250 (F)
(=$18,750+$37,500) so that the total increase in operating income is $37,000
+ $56,250 = $93,250.
Overall, the two most significant components of the increase in operating

income are the increase in sales units and price, combined with a significant,
favorable materials usage variance.
16-57
16-58 Partial Operational and Financial Productivity; Medical Practice (45 min)
1.,2. Partial operational and financial productivity and separation of partial financial productivity:
16-58
3.
MEMO
TO: Jay Kloger, Comprehensive Medical Care
FROM: Joseph Marin, Marin & Associates
I have calculated the financial partial productivity measure for CMC

for the current and prior year and the supporting documentation is attached.
Nursing productivity improved by .00314 over the prior year, while
administrative productivity improved by .0096. I attribute this to the greater
than 8% increase in patient demand, with only modest increases in nursing
hours, and a small decrease in administrative hours. These figures show that
the practice is managed very effectively.
There was a small decline in the pricing component of productivity,
since average wages increased in both nursing and administrative support;
overall, taking both the change in wages and change in hours into account,
the financial productivity of both nursing and administrative support improved
from the prior year.
An important finding is that the financial partial productivity of CMC
compared very well to the industry average, with a current productivity for
nursing at .04119, compared to the industry average of .035. This is a
significant achievement and shows that the management of the CMC practice
in nursing support is in very good shape. In contrast, the financial partial
productivity for the administrative support is below the industry average; CMC
has productivity of .096 in the current year relative to the industry average of
1.12. The good news, as noted above, is that the productivity of the
administrative support area is improving relative to the prior year, and these
improvements are needed to get CMC in line with the industry average. Note
also that the industry average productivity declined from 1.14 to 1.12 from the
prior year, while CMC improved on this measure.
16-59
16-59 Market Size and Market Share Variances; Foreign Currency

Fluctuations (20 min)
1.,2.
16-60
3.
The unfavorable market share for the domestic market reflects the decline in
the company’s sales as the market increased; the unfavorable market share
variance of $15,946.59 is partly offset by the favorable market size variance of
$5,496.59
The very large favorable market share variance of $85,448 for the export
market reflects the large increase in exports due at least in part to the falling
dollar. The dollar fell more than 10% from the expected level of $1.29 to the
Euro, sparking a more than 25% increase in export sales. The large increase
is due to the lower cost of the beer to Euro consumers, plus an additional
increase due perhaps to the Euro consumer becoming more familiar with the
Big Springs brand. This is good news for BSB, as it could mean that, when
the dollar should rise again relative to the Euro, it may be able to retain some
of its new customers there.
16-61
16-60 Sales and Variable Cost Variances; Current to Prior Year; Review
of Chapter 14 (30 min)
1.
The flexible budget, the center column, is determined as follows:

2010 sales at 2009 prices and unit variable costs
Sales: $1,097,208 = 39,200 x $27.99

Materials: $642,880 = 39,200 x $8.20 x 2 units of material/unit of
output
Labor: $441,000 = 39,200 x $15 x .75 hours/unit
Selling price variance: $162,288 = ($23.85 - $27.99) x 39,200
Volume Variance
Based on sales dollars: ($176,337) = (39,200-45,500) x $27.99
Based on contribution:
= $(176,337)
Less decrease in materials cost
(39,200-45,500) x $8.20 x 2 (103,320)
Less decrease in labor cost
(39,200 – 45,500) x $15 x .75 (70,875)
16-62
Volume variance based on contribution $(2,142)

2.
3.
The analysis above shows that RJM has succeeded in returning to
profitability, despite the falling sales and sales prices. RJM has accomplished
this through reductions in materials price and usage and reductions in labor
rate and usage. The single strongest effect on the company was the $4.14
drop in price (from $27.99 to $23.85), creating an unfavorable selling price
variance of $162,288 . The sales volume variance is relatively small at $2,142
because the unit contribution in 2009 (which is used as a base for calculating
the volume variance) is relatively small at $27.99 – ($8.2x2) – ($15x.75) =
$0.34 per unit; the variance is $0.34 x (45,500-39,200) = $2,142.
All the materials and labor variances are favorable, totaling
$204,232 in all.
16-63

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Chapter 16 - Operational Performance Measurement: Further Analysis of Productivity and Sales

2. Best performance of the industry or practice

16-8 The primary purpose of calculating productivity is to improve the operation.

16-9 Manufacturing personnel often prefer operational productivity measures to

16-10 Measurements of productivity help managers to improve operations of both JIT

R66 sales quantity variance: (2,000 - 1,600) x .75 x $10 = $3,000 F

Market share variance: (3% - 5%) x 100,000 x $25 = $50,000 U

Operational Partial Productivity = Actual Production/Actual Input

16-29 Financial Partial Productivity and Total Productivity (20 min)

Problem 16-29 (continued)

16-30 Operational and Financial Partial Productivity (20 min)

4. Among other factors that the firm needs to consider are:

16-31 Sales Performance at Hewlett-Packard (20 min)

What CEO Mark Hurd did:

Source: Pui-Wing Tam, “Hurd’s Big Challenge at H-P: Overhauling

16-32 Productivity: Which Way to Lean? (15 min)

1. Productivity measures can help a company become more efficient

2. The Toyota Production System (TPS) is a system designed to

For additional resources on lean manufacturing and lean accounting, see

2. Budgeted Average Contribution Margin

Budgeted average contribution margin per unit:

16-33 (continued -1)

3. Sales Mix and Sales Quantity Variances

4. Total Sales Volume Variances

16-34 Quality and Productivity (20 min)

This question is intended for class discussion. The objective is to try to

16-35 Productivity and the Economy (20 min)

The decline in investment in both capital expenditures and information

Useful sources: “America’s Productivity Growth Has Slowed; Does that

16-36 Alternative Measures of Productivity (20 min)

The measure based on manufacturing capacity utilization has a meaningful

Productivity as measured by output/input, as developed in this chapter is

Source: Kaj Grichnik and Conrad Winkler, Make or Break: How

16-37 Productivity Measures for Call Centers (20 min)

The measure proposed, number of calls/number of hours, is a common

Reference: Felix Barber and Rainer Strack, “The Surprising Economics of

16-38 Sales Mix and Quantity Variances (20 min)

1. Contribution Income Statement for Hathaway

2. The volume variances for each product are shown above:

Sales Mix Sales Quantity Volume

Sales Mix Variances

16-39 Operational Partial Productivity (15 min)

2. Productivity of direct material, CSU10, deteriorated from 0.727 in

16-40 Partial Financial Productivity (30 min)

4. The decompositions suggest that changes in financial productivity from

16-41 Total Productivity (15 min)

(c) Total productivity: (a) / (b) 0.0037537 0.0048396

2. Financial partial productivity measures indicate that the changes in

16-42 Operational and Financial Partial Productivity (45 min)

Change in profits from 2009 to 2010: $465,000 - $382,000 =

2.3., See spreadsheet on following sheet.

4. Both direct materials and direct labor operational partial productivity

16-42 (continued -1)

16-42 (continued -2)

5. See spreadsheet above in part 2. And 3.

16-43 Comparative Income Statements and Sales Performance

1. Comparative Income Statement for 2010 based on the flexible

The volume variances for each product:

The selling price variances are as follows:

16-43 (continued -1)

Sales Mix Variances

The strategy of increasing price on the one-inch model could have

16-44 Operational and Financial Partial and Total Productivity (30