7-21 Flexible budget.

Brabham Enterprises manufactures tires for the Formula I motor racing

circuit. For August 2017, it budgeted to manufacture and sell 3,000 tires at a variable cost of $74
per tire and total fixed costs of $54,000. The budgeted selling price was $110 per tire. Actual re-
sults in August 2017 were 2,800 tires manufactured and sold at a selling price of $112 per tire.
The actual total variable costs were $229,600, and the actual total fixed costs were $50,000.

Required:
1. Prepare a performance report (akin to Exhibit 7-2, page274) that uses a flexible budget and a
static budget.
2. Comment on the results in requirement 1.

SOLUTION

(20–30 min.) Flexible budget.

Variance Analysis for Brabham Enterprises for August 2017

Flexible-
Actual Budget Flexible Sales-Volume Static
Results Variances Budget Variances Budget
(1) (2) = (1) – (3) (3) (4) = (3) – (5) (5)
Units (tires) sold 2,800g 0 2,800 200 U 3,000g
Revenues $313,600a $ 5,600 F $308,000b $22,000 U $330,000c
Variable costs 229,600d 22,400 U 207,200e 14,800 F 222,000f
Contribution margin 84,000 16,800 U 100,800 7,200 U 108,000
Fixed costs 50,000g 4,000 F 54,000g 0 54,000g
Operating income $ 34,000 $12,800 U $ 46,800 $ 7,200 U $ 54,000

$12,800 U $ 7,200 U
Total flexible-budget variance Total sales-volume variance
$20,000 U
Total static-budget variance
a
112 × 2,800 = $313,600
b
$110 × 2,800 = $308,000
c
$110 × 3,000 = $330,000
d
Given. Unit variable cost = $229,600 ÷ 2,800 = $82 per tire
e
$74 × 2,800 = $207,200
f
$74 × 3,000 = $222,000
g
Given

2. The key information items are:

Actual Budgeted
Units 2,800 3,000
Unit selling price $ 112 $ 110
Unit variable cost $ 82 $ 74
Fixed costs $50,000 $54,000

The total static-budget variance in operating income is $20,000 U. There is both an unfavorable
total flexible-budget variance ($12,800) and an unfavorable sales-volume variance ($7,200).
 The unfavorable sales-volume variance arises solely because actual units manufactured and
sold were 200 less than the budgeted 3,000 units. The unfavorable flexible-budget variance of
$12,800 in operating income is due primarily to the $8 increase in unit variable costs. This
increase in unit variable costs is only partially offset by the $2 increase in unit selling price and
the $4,000 decrease in fixed costs.

7-22 Flexible budget. Beta Company’s budgeted prices for direct materials, direct manufac-
turing labor, and direct marketing (distribution) labor per luxury wallet are $41, $5, and $11, re-
spectively. The president is pleased with the following performance report:

Actual Costs Static Budget Variance

Direct materials $373,500 $410,000 $36,500 F

Direct manufacturing labor 48,600 50,000 1,400 F
Direct marketing (distribution) 103,500 110,000 6,500 F
labor

Required:
1. Actual output was 9,000 luxury wallets. Assume all three direct-cost items shown are
variable costs.
2. Is the president’s pleasure justified? Prepare a revised performance report that uses a
flexible budget and a static budget.

SOLUTION

(15 min.) Flexible budget.

The existing performance report is a Level 1 analysis, based on a static budget. It makes no
adjustment for changes in output levels. The budgeted output level is 10,000 units––direct
materials of $410,000 in the static budget ÷ budgeted direct materials cost per luxury wallet of
$41.
The following is a Level 2 analysis that presents a flexible-budget variance and a sales-
volume variance of each direct cost category.

Variance Analysis for Beta Company

Flexible- Sales-
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget
(1) (2) = (1) – (3) (3) (4) = (3) – (5) (5)
Output units 9,000 0 9,000 1,000 U 10,000
Direct materials $373,500 $4,500 U $369000 $41,000 F $410,000
Direct manufacturing labor 48,600 3,600 U 45000 5,000 F 50,000
Direct marketing labor 103,500 4,500 U 99000 11,000 F 110,000
Total direct costs $525,600 $12,600 U $513000 $57,000 F $570,000
 $12,600 U $57,000 F
Flexible-budget variance Sales-volume variance
$44,400 F
Static-budget variance

The Level 1 analysis shows total direct costs have a $44,400 favorable variance.
However, the Level 2 analysis reveals that this favorable variance is due to the reduction in
output of 1,000 units from the budgeted 10,000 units. Once this reduction in output is taken into
account (via a flexible budget), the flexible-budget variance shows each direct cost category to
have an unfavorable variance indicating less efficient use of each direct cost item than was
budgeted, or the use of more costly direct cost items than was budgeted, or both.
Each direct cost category has an actual unit variable cost that exceeds its budgeted unit
cost:
Actual Budgeted
Units 9,000 10,000
Direct materials $ 41.50 $ 41.00
Direct manufacturing labor $ 5.40 $ 5.00
Direct marketing labor $ 11.50 $ 11.00

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

7-26 Price and efficiency variances. Modern Tiles Ltd. manufactures ceramic tiles. For Janu-
ary 2017, it budgeted to purchase and use 10,000 pounds of clay at $0.70 a pound. Actual pur-
chases and usage for January 2017 were 11,000 pounds at $0.65 a pound. Modern Tiles Ltd. bud-
geted for 40,000 ceramic tiles. Actual output was 43,000 ceramic tiles.

Required:
1. Compute the flexible-budget variance.
2. Compute the price and efficiency variances.
3. Comment on the results for requirements 1 and 2 and provide a possible explanation for
them.

SOLUTION

(20–30 min.) Price and efficiency variances.

1. The key information items are:

Actual Budgeted
Output units (Tiles) 43,000 40,000
Input units (pounds of clay) 11,000 10,000
Cost per input unit $ 0.65 $ 0.70

Modern tiles budgets to obtain four tiles from each pound of clay.
The flexible-budget variance is $ 375 F.
 Flexible-
Actual Budget Flexible Sales-Volume Static
Results Variance Budget Variance Budget
(1) (2) = (1) – (3) (3) (4) = (3) – (5) (5)
Clay costs $7,150a $375 F $7,525b $525 U $7,000c
a
11,000 × $0.65 = $7,150
b
43,000 × 0.25 × $0.70 = $7,525
c
40,000 × 0.25 × $0.70 = $7,000

2. Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
$7,150a $7,700b $7,525c

$550 F $175 U
Price variance Efficiency variance
$375 F
Flexible-budget variance
a
11,000 × $0.65 = $7,150
b
11,000 × $0.70 = $7,700
c
43,000 × 0.25 × $0.70 = $7,525

3. The favorable flexible-budget variance of $375 has two offsetting components:

(a) favorable price variance of $550––reflects the $0.65 actual purchase cost being lower
than the $0.70 budgeted purchase cost per pound.
(b) unfavorable efficiency variance of $175––reflects the actual materials yield of 3.90
tiles per pound of clay (43,000 ÷ 11,000 = 3.90) being less than the budgeted yield of
4.00 (40,000 ÷ 10,000 = 4.00). The company used more clay (materials) to make the
tiles than was budgeted.

A possible explanation may be that Modern tiles purchased lower quality clay at a lower cost per
pound.

7-27 Materials and manufacturing labor variances. Consider the following data collected
for Theta Homes, Inc.:
Direct Materi- Direct Manufac-
als turing Labor
Cost incurred: Actual inputs × actual prices $ 150,000 $100,000
Actual inputs × standard prices 162,000 95,000
Standard inputs allowed for actual output × standard 168,000 90,000
prices
Required:
Compute the price, efficiency, and flexible-budget variances for direct materials and direct manu-
facturing labor.

SOLUTION

(15 min.) Materials and manufacturing labor variances.

Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
Direct $150,000 $162,000 $168,000
Materials
$12,000 F $6,000 F
Price variance Efficiency variance

$18,000 F
Flexible-budget variance

Direct $100,000 $95,000 $90,000

Mfg. Labor $5,000 U $5,000 U
Price variance Efficiency variance

$10,000 U
Flexible-budget variance

7-34 Flexible budget, direct materials, and direct manufacturing labor variances. Milan
Statuary manufactures bust statues of famous historical figures. All statues are the same size.
Each unit requires the same amount of resources. The following information is from the static
budget for 2017:
Expected production and sales 6,100 units
Expected selling price per unit $ 700
Total fixed costs $1,350,000
Standard quantities, standard prices, and standard unit costs follow for direct materials and direct
manufacturing labor:

Standard Quantity Standard Standard Unit Cost

Price
Direct materials 16 pounds $14 per pound $224
Direct manufacturing labor 3.8 hours $ 30 per hour $114
During 2017, actual number of units produced and sold was 5,100, at an average selling price of
$730. Actual cost of direct materials used was $1,149,400, based on 70,000 pounds purchased at
$16.42 per pound. Direct manufacturing labor-hours actually used were 17,000, at the rate of
$33.70 per hour. As a result, actual direct manufacturing labor costs were $572,900. Actual fixed
costs were $1,200,000. There were no beginning or ending inventories.

Required:
1. Calculate the sales-volume variance and flexible-budget variance for operating income.
2. Compute price and efficiency variances for direct materials and direct manufacturing labor.

SOLUTION

(30 min.) Flexible budget, direct materials and direct manufacturing labor variances.
1. Variance Analysis for Milan Statuary for 2014
Flexible- Sales-
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget

(1) (2) = (1) – (3) (3) (4) = (3) – (5) (5)

Units sold 5,100a 0 5,100 1,000 U 6,100a
Revenues $3,723,000 b
$153,000 F $3,570,000c $700,000 U $4,270,000d
Direct materials $1,149,400 $ 7,000 U $1,142,400e $224,000 F $1,366,400f
Direct manufacturing labor 572,900 a
8,500 F 581,400g 114,000 F 695,400h
Fixed costs 1,200,000a 150,000 F 1,350,000a 0 1,350,000a
Total costs $2,922,300 $151,500 F $3,073,800 $338,000 F $3,411,800
Operating income $ 800,700 $304,500 F $ 496,200 $362,000 U $ 858,200

$304,500 F $362,000 U

Flexible-budget variance Sales-volume variance

$57,500 U
Static-budget variance
a
Given
b
$730/unit × 5,100 units = $3,723,000
c
$700/unit × 5,100 units = $3,570,000
d
$700/unit × 6,100 units = $4,270,000
e
$224/unit × 5,100 units = $1,142,400
f
$224/unit × 6,100 units = $1,366,400
g
$114/unit × 5,100 units = $581,400
h
$114/unit × 6,100 units = $695,400
2. Flexible Budget
(Budgeted Input
Actual Incurred Qty. Allowed for
(Actual Input Qty Actual Input Qty. Actual Output ×
× Actual Price) × Budgeted Price Budgeted Price)
Direct materials $1,149,400a $980,000b $1,142,400c

$169,400 U $162,400 F

Price variance Efficiency variance

$7,000 U
Flexible-budget variance

Direct manufacturing labor $572,900d $510,000e $581,400f

$62,900 U $71,400 F

Price variance Efficiency variance

$8,500 F
Flexible-budget variance
a
70,000 pounds × $16.42/pound = $1,149,400
b
70,000 pounds × $14/pound = $980,000
c
5,100 statues × 16 pounds/statue × $14/pound = 81,600 pounds × $14/pound = $1,142,400
d
17,000 hours × $33.70/hour = $572,900
e
17,000 hours × $30/hour = $510,000
f
5,100 statues × 3.8 hours/statue × $30/hour = 19,380 hours × $30/hour = $581,400

7-38 Material-cost variances, use of variances for performance evaluation. Katharine John-
son is the owner of Best Bikes, a company that produces high-quality cross-country bicycles. Best
Bikes participates in a supply chain that consists of suppliers, manufacturers, distributors, and elite
bicycle shops. For several years Best Bikes has purchased titanium from suppliers in the supply
chain. Best Bikes uses titanium for the bicycle frames because it is stronger and lighter than other
metals and therefore increases the quality of the bicycle. Earlier this year, Best Bikes hired Michael
Bentfield, a recent graduate from State University, as purchasing manager. Michael believed that he
could reduce costs if he purchased titanium from an online marketplace at a lower price.
Best Bikes established the following standards based upon the company’s experience with
previous suppliers. The standards are as follows:

Cost of titanium $18 per pound

Titanium used per bicycle 8 lbs.

Actual results for the first month using the online supplier of titanium are as follows:

Bicycles produced 400

 Titanium purchased 5,200 lb. for $88,400

Titanium used in production 4,700 lb.

Required:
1. Compute the direct materials price and efficiency variances.
2. What factors can explain the variances identified in requirement 1? Could any other variances
be affected?
3. Was switching suppliers a good idea for Best Bikes? Explain why or why not.
4. the production manager’s evaluation be based solely on efficiency variances? Why is it im-
portant for Katharine Johnson to understand the causes of a variance before she evaluates
performance?
5. Other than performance evaluation, what reasons are there for calculating variances?
6. What future problems could result from Best Bikes’ decision to buy a lower quality of tita-
nium from the online marketplace?

SOLUTION

(35 min.) Material cost variances, use of variances for performance evaluation

1. Materials Variances

Actual Costs Flexible Budget

Incurred (Budgeted Input Qty. Allowed
(Actual Input Qty. Actual Input Qty. for Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
Purchases Usage
Direct (5,200 × $17a) (5,200 × $18) (4,700 × $18) (400 × 8 × $18)
Materials $88,400 $93,600 $84,600 (3,200 × $18)
$57,600

$5,200 F $27,000 U
Price variance Efficiency variance
a
$88,400 ÷5,200 = $17

2. The favorable price variance is due to the $1 difference ($18 - $17) between the standard
price based on the previous suppliers and the actual price paid through the on-line
marketplace. The unfavorable efficiency variance could be due to several factors
including inexperienced workers and machine malfunctions. But the likely cause here is
that the lower-priced titanium was lower quality or less refined, which led to more waste.
The labor efficiency variance could be affected if the lower quality titanium caused the
workers to use more time.

3. Switching suppliers was not a good idea. The $5,200 savings in the cost of titanium was
outweighed by the $27,000 extra material usage. In addition, the $27,000 U efficiency
 variance does not recognize the total impact of the lower quality titanium because, of the
5,200 pounds purchased, only 4,700 pounds were used. If the quantity of materials used
in production is relatively the same, Best Bikes could expect the remaining 500 lbs to
produce approximately 40 more units. At standard, 40 more units should take 40 × 8 =
320 lbs. There could be an additional unfavorable efficiency variance of

(500  $18) (40 × 8 × $18)

$9,000 $5,760

$3,240U

4. The purchasing manager’s performance evaluation should not be based solely on the
price variance. The short-run reduction in purchase costs was more than offset by higher
usage rates. His evaluation should be based on the total costs of the company as a whole.
In addition, the production manager’s performance evaluation should not be based solely
on the efficiency variances. In this case, the production manager was not responsible for
the purchase of the lower-quality titanium, which led to the unfavorable efficiency scores.
In general, it is important for Johnson to understand that not all favorable material price
variances are “good news,” because of the negative effects that can arise in the
production process from the purchase of inferior inputs. They can lead to unfavorable
efficiency variances for both materials and labor. Johnson should also that understand
efficiency variances may arise for many different reasons and she needs to know these
reasons before evaluating performance.

5. Variances should be used to help Best Bikes understand what led to the current set of
financial results, as well as how to perform better in the future. They are a way to
facilitate the continuous improvement efforts of the company. Rather than focusing solely
on the price of titanium, Scott can balance price and quality in future purchase decisions.

6. Future problems can arise in the supply chain. Bentfield may need to go back to the
previous suppliers. But Best Bikes’ relationship with them may have been damaged and
they may now be selling all their available titanium to other manufacturers. Lower quality
bicycles could also affect Best Bikes’ reputation with the distributors, the bike shops and
customers, leading to higher warranty claims and customer dissatisfaction, and decreased
sales in the future.

7-41 Direct materials and manufacturing labor variances, solving unknowns. (CPA,
adapted) On May 1, 2017, Lowell Company began the manufacture of a new paging machine known
as Dandy. The company installed a standard costing system to account for manufacturing costs.

The standard costs for a unit of Dandy follow:

Direct materials (2 lb. at $3 per lb.) $6.00

Direct manufacturing labor (1/2 hour at $16 per hour) 8.00
Manufacturing overhead (80% of direct manufacturing labor costs) 6.40
$20.40
 The following data were obtained from Lowell’s records for the month of May:
Debit Credit
Revenues $150,000
Accounts payable control (for May’s purchases of direct materials) 36,300
Direct materials price variance $4,500
Direct materials efficiency variance 2,900
Direct manufacturing labor price variance 1,700
Direct manufacturing labor efficiency variance 2,000

Actual production in May was 4,700 units of Dandy, and actual sales in May were 3,000 units.
The amount shown for direct materials price variance applies to materials purchased during
May. There was no beginning inventory of materials on May 1, 2017. Compute each of the fol-
lowing items for Lowell for the month of May. Show your computations.

Required:
1. Standard direct manufacturing labor-hours allowed for actual output produced
2. Actual direct manufacturing labor-hours worked
3. Actual direct manufacturing labor wage rate
4. Standard quantity of direct materials allowed (in pounds)
5. Actual quantity of direct materials used (in pounds)
6. Actual quantity of direct materials purchased (in pounds)
7. Actual direct materials price per pound

SOLUTION

(20–30 min.) Direct materials and manufacturing labor variances, solving unknowns.

All given items are designated by an asterisk.

Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
Direct
Manufacturing (2,350 × $15.87) (2,350 × $16*) (4,700* × 0.5* × $16*)
Labor $37,300 $35,600 $37,600

$1,700 U* $2,000 F*
Price variance Efficiency variance

Purchases Usage
Direct (10,600 × $3.42) (10,600 × $3*) (10,367 × $3*) (4,700* × 2* × $3*)
Materials $36,300* $31,800 $31,100 $28,200
 $4,500 U* $2,900 U*
Price variance Efficiency variance

1. 4,700 units × 0.5 hours/unit = 2,350 hours

2. Flexible budget – Efficiency variance = $37,600 – $2,000 = $35,600

Actual dir. manuf. labor hours = $35,600 ÷ Budgeted price of $16/hour = 2,225 hours

3. $35,600 + Price variance, $1,700 = $37,300, the actual direct manuf. labor cost
Actual rate = Actual cost ÷ Actual hours = $37,300 ÷ 2,225 hours = $17/hour (rounded)

4. Standard qty. of direct materials = 4,700 units × 2 pounds/unit = 9,400 pounds

5. Flexible budget + Dir. matls. effcy. var. = $28,200 + $2,900 = $31,100

Actual quantity of dir. matls. used = $31,100 ÷ Budgeted price per lb
= $31,100 ÷ $3/lb = 10,367 lbs

6. Actual cost of direct materials, $36,300 – Price variance, $4,500 = $31,800

Actual qty. of direct materials purchased = $31,800 ÷ Budgeted price, $3/lb = 10,600 lbs.

7. Actual direct materials price = $36,300 ÷ 10,600 lbs = $3.42 per lb