CHAPTER 7

FLEXIBLE BUDGETS, DIRECT-COST VARIANCES,

AND MANAGEMENT CONTROL

Try It! 7-1

(a) Static-budget variance for revenues = (1,500 units × $190) − (1,400 units × $200)
= $285,000 − $280,000
= $5,000 F

(b) Static-budget variance for variable costs = $162,750 − (1,400 units × $110)
= $8,750 U

(c) Static-budget variance for fixed costs = $75,000 − $77,000

= $2,000 F

(d) Static-budget variance for operating income = $1,750 U

Actual Static Static-Budget

Results Budget Variance
Units sold 1,500 1,400 100 F

Revenues $285,000 $280,000 $5,000 F

Variable costs 162,750 154,000 8,750 U
Contribution margin $122,250 $126,000 3,750 U
Fixed costs 75,000 77,000 2,000 F
Operating income $ 47,250 $ 49,000 $1,750 U

Try It! 7-2

(a) Flexible budget for revenues = Actual units × Budgeted selling price per unit
= 1,500 units × $200
= $300,000

(b) Flexible budget for variable costs = Actual units × Budgeted variable cost per unit
= 1,500 units × $110
= $165,000

(c) Flexible budget for fixed costs = Static budget

= $77,000

(d) Flexible budget for operating income = $300,000 − $165,000 − $77,000

= $58,000

7-1
Try It! 7-3

Variance Analysis for Jay Draperies

Flexible- Sales -
Actual Budget Flexible Volume Static
Results Variances Budget Variance Budget
(1) (2) = (1)-(3) (3) (4) = (3)-(5) (5)
Units sold 1,500 1,500 1,400

Revenues (a) $285,000 $ 15,000 U $300,000 $20,000 F $280,000

Variable costs (b) 162,750 2,250 F 165,000 11,000 U 154,000
Contribution margin 122,250 12,750 U 135,000 9,000 F 126,000
Fixed costs (c) 75,000 2,000 F 77,000 0 77,000
Operating income (d) $ 47,250 $10,750 U $ 58,000 $ 9,000 F $ 49,000

Level 2 $10,750 U $ 9,000 F

Flexible-budget variance Sales-volume variance

Level 1 $1,750 U
Static-budget variance

Try It! 7-4

a. Direct materials variances:

Actual unit cost = $67,200 ÷ 14,000 square yards

= $4.80 per square yard

Price variance = 14,000 × ($4.80 − $5.00)

= $2,800 F

Efficiency variance = $5.00 × [14,000 − (1,500 × 10)]

= $5,000 F

b. Direct manufacturing labor variances:

Actual labor rate = $95,550 ÷ 7,800 hours

= $12.25 per hour

Price variance = 7,800 × ($12.25 − $12.00)

= $1,950 U

Efficiency variance = $12.00 × (7,800 − 1,500 × 5)

= $3,600 U

7-2
Questions
7-1 Variances combine planning and control functions (and strategy setting) of management and
facilitate management by exception, whereby managers focus more on areas that are not operating as
expected than on areas that are. For example, large variances can sometimes indicate that a company
should consider a change in strategy or a change in standard setting and control.

Variances help identify deviations from planned performance and be used for evaluating performance
and to motivate managers.

7-2 Standard costs are carefully determined prices, costs, or quantities that are used as
benchmarks for judging performance. Standards are usually expressed on a per-unit basis.
Managers use standard costs to set performance; they are periodically compared with actual costs
incurred and income generated in order to establish any variances.

7-5 A flexible-budget analysis enables a manager to distinguish how much of the difference
between an actual result and a budgeted amount is due to (a) the difference between actual and
budgeted output levels, and (b) the difference between actual and budgeted selling prices, variable
costs, and fixed costs.

7-11 Variance analysis, by providing information about actual performance relative to standards,
can form the basis of continuous operational improvement. The underlying causes of unfavorable
variances are identified and corrective action taken where possible. Favorable variances can also
provide information if the organization can identify why a favorable variance occurred. Steps can often
be taken to replicate those conditions more often. As the easier changes are made, and perhaps some
standards tightened, the harder issues will be revealed for the organization to act on—this is continuous
improvement.

7-3
Multiple-Choice Questions
7-13 Choice ‘a’ is incorrect because the computation includes only the Actual input quantity ×
budgeted price.

Choice ‘b’ is correct. Material efficiency variance is the difference between the [Actual input quantity
× budgeted price] – [Budgeted input quantity × budgeted price]. This can be represented in the chart
as:

Actual input quantity × budgeted price Budgeted input quantity × budgeted price (flexible budget)
55,000kg × €0.20 = €11,000 53,000kg × €0.20 = €10,600

€400 Unfavorable

Choice ‘c’ is incorrect because the computation includes only the Budgeted input quantity (flexible
budget) × budgeted price.

Choice ‘d’ is incorrect because the computation adds the Actual input quantity × budgeted price to the
Budgeted input quantity (flexible budget) × budgeted price.

7-17 Choice ‘a’ is incorrect because the computation includes only the Actual input quantity ×
budgeted price.

Choice ‘b’ is incorrect because the computation includes only the Actual input quantity × Actual price

Choice ‘c’ is correct. Material price variance is the difference between the [Actual input quantity ×
actual price] – [Actual input quantity × budgeted price]. This can be represented in the chart as:
Actual input quantity × actual price Actual input quantity × budgeted price
55,000kg x €0.23 = €12,650 55,000kg x €0.20 = €11,000

Choice ‘d’ is incorrect because the computation adds the Actual input quantity × actual price to the
Actual input quantity × budgeted price

7-18 Choice ‘a’ is incorrect because the computation includes only the Actual input hours ×
budgeted price.

Choice ‘b’ is incorrect because the computation includes only the Actual input hours × Actual price

Choice ‘c’ is incorrect because the computation adds the Actual input hours × actual price to the Actual
input hours × budgeted price

Choice ‘d’ is correct. Labor price variance is the difference between the [Actual input hours × actual
price] – [Actual input hours × budgeted price]. This can be represented in the chart as:

7-4
 Actual input hours × actual price Actual input hours × budgeted price
41,500 hours × €1.75 = €72,625 41,500 hours x €1.50 = €62,250

€10,375 Unfavorable

7-19 Choice ‘a’ is incorrect because the computation includes only the Actual input hours ×
budgeted price.

Choice ‘b’ is correct. Labor efficiency variance is the difference between the [Actual input hours x
budgeted price] – [Budgeted input hours x budgeted price]. This can be represented in the chart as:
Actual input hours × budgeted price Budgeted input hours × budgeted price (flexible
budget)
41,500 hrs × €1.50 = €62,250 42,400 hrs × €1.50 = €63,600

€1,350 Favorable

Choice ‘c’ is incorrect because the computation includes only the Budgeted input hours (flexible
budget) × budgeted price.

Choice ‘d’ is incorrect because the computation adds the Actual input quantity × actual price to the
Budgeted input hours (flexible budget) × budgeted price.

7-20 Choice ‘a’ is correct. Fixed overhead variance is the difference between the Budgeted fixed
costs – Actual fixed costs. This can be represented in the chart as:

Budgeted fixed costs Actual fixed costs

€13,000 €11,600

€1,400 Favorable

Choice ‘b’ is incorrect because the computation includes only the Actual fixed cost incurred.

Choice ‘c’ is incorrect because the computation includes only the Budgeted fixed costs.

Choice ‘d’ is incorrect because the computation adds the Actual costs to the Budgeted costs.

7-5
Exercises
7-22 (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 L’Accessorio

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

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.

7-6
7-23 (25-30 min.) Flexible-budget preparation and analysis.
a. Prepare a static-budget-based variance analysis of last month’s performance.
Actual Budget (£) Static-Budget Static Budget (£)
(1) Variances (£) (3)
(2) = (1) – (3)
Output (units) 15,000 5,000 U 20,000
£ £
Revenue 153,900a 56,100 U 210,000c
Direct labor (4,000 hrs) 35,040d 10,960 F 46,000f
Direct materials (32,000 meters) 23,360g 6,640 F 30,000h
Contribution margin 95,500 38,500 U 134,000
Fixed costs 67,350 1,350 U 66,000
Operating income 28,150 39,850 U 68,000

£39,850 U

Total static-budget variance

b. Prepare a flexible-budget-based variance analysis of last month’s performance.

Actual Flexible- Flexible Sales Static

budget £) Budget budget Volume budget
(1) Variances (£) (£) Variances (£) (£)
(2) = (1) – (3) (3) (4) = (3) – (5) (5)
Output 15,000 0 15,000 5,000 U 20,000
(units)
£ £ £
Revenue 153,900a 3,600 U 157,500b 52,500 U 210,000c
e
Direct labor 540 U 34,500 11,500 F 46,000f
35,040d
Direct 23,360g 860 U 7,500 F 30,000h
materials 22,500i
Contribution 95,500 5,000 U 100,500 33,500 U 134,000
margin
Fixed costs 67,350 1,350 F 66,000 0 66,000
Operating 28,150 6,350 U 34,500 33,500 U 68,000
income

Total flexible-budget variance Total sales-volume variance

£39,850 U
Total statics-budget variance

7-7
a. £10.26 × 15,000 = £153,900
b. £10.50 × 15,000 = £157,500
c. £10.50 × 20,000 = £210,000
d. £8.75 × 4000 = £35,040
e. £2.30 × 15,000 = £34,500
f. £2.30 × 20,000 = £46,000
g. £0.73 × 32,000 = £23,360
h. £1.50 × 20,000 = £30,000
i. £1.50 × 15,000 = £22,500

c. Which departmental manager(s) contributed the most for the success or failure of the budget
during the month? Explain your answer.
The flexible budget figures indicate that the sales department, which is responsible for the revenue of
the business, was largely responsible for the poor performance of the business. There was a shortfall
of £52,500 in sales revenue and £1,350 in fixed costs budgets leading to a fall of £6,350 in the
operating income. The company recorded favorable performance in the variable costs.

7-25 Budgeted and actual performance for the week:

Actual Flexible – Budget Flexible Sales – Volume Static Budget

results (€) Variances (€) Budget (€) Variances (€) (€)
(1) (2) = (1) – (3) (3) (4) = (3) – (5) (5)
a
Unit sold 25 0 25 5U 30
Revenues 2,100 100 F 2,000 400 U 2,400
Direct material 385 85 U 300 60 F 360
Direct 1,176b 24 F 1,200c 240 F 1,440d
manufacturing
labor
Contribution 539 39 U 500 100 U 600
margin
Fixed 280 20 U 240 0 240
manufacturing
costs
Operating 259 1U 260 100 U 360
income
a
(3 workers × 40 hrs per week) / 4 hrs per cabinet = 30 cabinets
b
(40 hrs per week × 2 workers × €12 ) + (2 workers × 6 overtime hours each× €18) = €1,176
Note:
actual number of hrs = (40 hrs per week×2 workers) + (2 workers × 6 overtime hrs each) = 92 hrs
labor cost per hour for overtime = €12 × 1.5 = €18
c
[€1,440 / 30 (Budgeted DL cost per unit)] × 25 units (actual units produced)
or (4 hrs per unit × 25 units of output) × €12
d
3 workers × 40 hrs per week × €12

7-8
Working(s):
Static budget Flexed Actual
Units Price Amount Units Price Amount Units Price Amount
€ € € € € €
Sales 30 80 2,400 25 80 2,000 25 84 2,100

Labor 120 12 1,440 100 12 1,200 80 12

12 18
92 12.78 1,176
Materials 60 6 360 50 6 300 55 7 385
Contribution 600 500 539
Fixed costs 240 240 280
Profit 360 260 259

i. Direct material price variance

(Actual price of input – Budgeted price of input) x Actual quantity of input = Price
variance
(€6 - €7) × 55sq m = €55 U
ii. Material efficiency variance
(Actual quantity of input – Budgeted quantity of input allowed for actual output) ×
Budgeted price of input = efficiency variance
(50sq m – 55 sq m) × €6 = €30 U
Note: 2 sq meters of timber required to make a unit. Therefore 25 units × 2 sq meters = 50
sq meters.
iii. Direct labor price variance
(Actual price of input – Budgeted price of input) x Actual quantity of input = Price
variance
(€12 - €12.78) × 92 hrs = €72 U

Note: €12.78 = Actual costs of labor = €1,176 (see also Working table above)
Total actual hrs 92

iv. Manufacturing labor efficiency variance

(Actual quantity of input – Budgeted quantity of input allowed for actual output) ×
Budgeted price of input = efficiency variance
(92hrs – 100hrs) × €12 = €96 F
Actual quantity of input
= 2 workers × (40 hrs per week + 6 overtime hours each) = 92 hrs
Budgeted quantity of input allowed for actual output
= 4 hrs per unit × 25 cabinets = 100 hrs

7-9
7-26 (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

According to the budgeted output units (tiles) and budgeted input units (pounds of clay),
modern tiles budgets to obtain four tiles from each pound of clay. Thus, a tile is budgeted to
input 0.25 pound of clay (1 pound of clay / 4 tiles = 0.25 pounds of clay per tile).
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 input units × $0.65 = $7,150
b
43,000 output units × 0.25 per output unit × $0.70 = $7,525
c
40,000 output units × 0.25 per output unit × $0.70 = $7,000 or 10,000 input units × $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)
$13,600a $14,720b $13,616c

$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.

7-10
7-27 (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

7-11
7-28 (20 min.) Direct materials and direct manufacturing labor variances.

1.
Actual
Quantity 
Actual Price Budgeted Efficiency Flexible
May 2020 Results Variance Price Variance Budget
(1) (2) = (1)–(3) (3) (4) = (3) – (5) (5)
Units 450 450

$1,710.0
Direct materials $13,338.00 0 U $11,628.00a $918.00 U $10,710.00b
Direct labor $ 5,535.00 $ 67.50 U $ 5,467.50c $364.50 F $ 5,832.00d
$1,777.5
Total price variance 0 U
Total efficiency
variance $553.50 U
a
6,840 meters × $1.70 per meter = $11,628
b
450 lots × 14 meters per lot × $1.70 per meter = $10,710
c
675 hours × $8.10 per hour = $5,467.50
d
450 lots × 1.6 hours per lot × $8.10 per hour = $5,832

Total flexible-budget variance for both inputs = $1,777.50U + $553.50U = $2,331.00U

Total flexible-budget cost of direct materials and direct labor = $10,710 + $5,832 = $16,542
Total flexible-budget variance as % of total flexible-budget costs = $2,331.00 ÷ $16,542 = 14.09%

2. Efficiencies have improved in the direction indicated by the production manager—but, it is

unclear whether they are a trend or a one-time occurrence. Also, overall, variances are still 7.8
percent of flexible input budget. SallyMay should continue to use the new material, especially
considering its superior quality and feel, but it may want to keep the following points in mind:
 The new material costs substantially more than the old ($1.95 in 2019 and $1.852 in 2020
versus $1.70 per meter). Its price is unlikely to come down even more within the coming
year. Standard material price should be re-examined and possibly changed.
 SallyMay should continue to work to reduce direct materials and direct manufacturing
labor content. The reductions from May 2019 to May 2020 are a good development and
should be encouraged.

7-12
7-32 25 min.) Price and efficiency variances, benchmarking.

1.

Mineola Plant
Prices and quantities Cost per lot
Direct materials 13.50 lbs @ $ 9.20 per lb $124.20
Direct labor 3 hrs @ $10.15 per hr 30.45
Variable overhead 12.00
Budgeted variable cost $166.65

Bayside Plant
Prices and quantities Cost per lot
Direct materials 14.00 lbs @ $ 9.00 per lb $126.00
Direct labor 2.7 hrs @ $10.20 per hr 27.54
Variable overhead 11.00
Budgeted variable cost $164.54

Land Art
Prices and quantities Cost per lot
Direct materials 13.00 lbs @ $ 8.80 per lb $114.40
Direct labor 2.5 hrs @ $10.00 per hr 25.00
Variable overhead 11.00
Budgeted variable cost $150.40
2. Mineola Plant

Actual
Actual Price Quantity  Efficiency Flexible
Results Variance Budgeted Variance Budgeta
(1) (2) = (1) – (3) Price (3) (4) = (3) – (5) (5)
Lots 1,000 1,000
Direct Materials $124,200 $5,400 U $118,800b $4,400 U $114,400
Direct Labor $ 30,450 $450 U $ 30,000c $5,000 U $ 25,000

a
Using Land Art’s prices and quantities as the standard:
Direct materials: (13 lbs./lot × 1,000 lots) × $8.80/lb. = $114,400
Direct labor: (2.5 hrs./lot × 1,000 lots) × $10.00/hr. = $25,000
b
(13.50 lbs./lot × 1,000 lots) × $8.80 per lb. = $118,800
c
(3 hours/lot × 1,000 lots) × $10/hr. = $30,000

Bayside Plant

Actual
Actual Price Quantity  Efficiency Flexible
Results Variance Budgeted Variance Budgeta
(1) (2) = (1) – (3) Price (3) (4) = (3) – (5) (5)
Lots 1,000 1,000
Direct Materials $126,000 $2,800 U $123,200b $8,800 U $114,400
Direct Labor $ 27,540 $540 U $ 27,000c $2,000 U $ 25,000

a
Using Land Art’s prices and quantities as the standard:
Direct materials: (13 lb./lot × 1,000 lots) × $8.80/lb. = $114,400
Direct labor: (2.5 hrs./lot × 1,000 lots) × $10.00/lb. = $25,000
b
(14 lbs./lot × 1,000 lots) × $8.80 per lb. = $123,200
c(2.7 hours/lot × 1,000 lots) × $10/hr. = $27,000

3. Using an objective, external benchmark, like that of a competitor, will preempt the possibility of any
one plant feeling that the other is being favored. That this competitor, Land Art, is successful will also
put positive pressure on the two plants to improve (note that all variances are unfavorable). Issues that
Topiary should keep in mind include the following:
 Ensure that Land Art is indeed the best and most relevant standard (for example, is there another
competitor in the marketplace which should be considered?).
 Ensure that the data is reliable.
 Ensure that Land Art is similar enough to use as a standard (if Land Art has a different business model,
for example, it may be following a strategy of lowering costs that Topiary may not want to emulate
because Topiary is trying to differentiate its products).
Problems
7-34 (30 min.) Flexible budget, direct materials and direct manufacturing labor variances.

1. Variance Analysis for Milan Statuary for 2020

Flexible- Sales-
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget
(1) (2) = (1) – (3) (3) (4) = (3) – (5) (5)
a
Units sold 5,100 0 5,100 1,000 U 6,100a
b
Revenues $3,723,000 $153,000 F $3,570,000 $700,000 U $4,270,000d
c

Direct materials $1,149,400 $ 7,000 U $1,142,400e $224,000 F $1,366,400f

Direct manufacturing labor 572,900a 8,500 F 581,400g 114,000 F 695,400h
Fixed costs 1,200,000a 150,000 F 1,350,000 a
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
7-36 (30 mins.) Comprehensive variance analysis review.

Actual results

Units sold 1,400 units

Selling price per unit $152
Revenues (1,400 × $152) $212,800

Direct materials purchased and used:

Direct materials per unit $5.50
Total direct materials cost (22,000 sq. meters × $5.50) $121,000
Direct labor:
Actual direct labor rate per hour $5.00
Total direct labor costs (6,800 hours × $5.00) $34,000
Variable costs:
Variable cost per unit $2.21
Total variable costs (6,800 hours × $2.21) $15,000
Fixed overheads $6,000

Static Budgeted Amounts

Units sold 1,000
Selling price per unit $150
Revenues (1,000 hours × $150) $150,000
Direct materials purchased:
Direct materials per unit $67.50
Total direct materials costs (1,000 units × $67.50) $67,500
Direct labor:
Direct labor rate per hour $30.00
Total direct labor cost (1,000 units × $30.00) $30,000
Variable costs:
Variable costs per unit $15.00
Total variable costs (1,000 units × $15.00) $15, 000
Fixed costs $7,500

1. Actual Static-Budget
Results Amounts
Revenues $212,800 $150,000
Variable costs
Direct materials 121,000 67,500
Direct labor 34,000 30,000
Variable costs 15,000 15,000
Total variable costs 170,000 112,500
Contribution margin 42,800 37,500
Fixed costs 6,000 7,500
Operating income $36,800 $30,000

2. Actual operating income $36,800

Static-budget operating income 30,000
 Total static-budget variance $ 6,800 F

Flexible-budget-based variance analysis for June:

Sales-
Actual Flexible-Budget Flexible Volume Static
Results Variances Budget Variances Budget
(1) (2) = (1) – (3) (3) (4) = (3) – (5) (5)
Units sold 1,400 0 1,400 400 1,000

Revenues $212,800 $ 2,800 F $210,000 $ 60,000 F $150,000

Variable costs
Direct materials 121,000 26,500 U 94,500 27,000 U 67,500
Direct labor 34,000 8,000 F 42,000 12,000 U 30,000
Variable costs 15,000 6,000 F 21,000 6,000 U 15,000
Total variable costs 170,000 12,500 U 157,500 45,000 U 112,500
Contribution margin 42,800 9,700 U 52,500 15,000 F 37,500
Fixed costs 6,000 1,500 F 7,500 0 7,500
Operating income $36,800 $8,200 U $45,000 $15,000 F $30,000
$6,800 F

Total static-budget variance

$8,200 U $15,000 F
Total flexible-budget Total sales-volume
variance variance

3. Flexible-budget operating income = $45,000.

4. Flexible-budget variance for operating income = $8,200 U.
5. Sales-volume variance for operating income = $15,000 U.
6. Price variance for direct manufacturing labor = $34,000 – $6 × 6,800 = $6,800 F
Efficiency variance for direct manufacturing labor = (6,800 – 5 × 1,400) × $6 = $1,200 F
7. Flexible-budget variance for direct manufacturing labor = $34,000 – $42,000 = $8,000 F
7-40 (35 min.) Direct materials efficiency, mix, and yield variances

1. Peanuts ($1 × 50 cups) $ 50

Dried cranberries ($2 × 30 cups) 60
Chocolate pieces ($3 × 20 cups) 60
Budgeted cost per batch $ 170
Number of batches × 100
Budgeted Cost $17,000

1. Solution Exhibit 7-40A presents the total price variance ($22 F), the total efficiency variance
($820 U), and the total flexible-budget variance ($798 U).

SOLUTION EXHIBIT 7-40A

Columnar presentation of direct materials price and efficiency variances for GoodFoods

2. Solution Exhibit 7-40B presents the total direct materials yield ($1700 U) and mix variances ($880
F).
SOLUTION EXHIBIT 7-40A
Columnar presentation of direct materials yield and mix variances for GoodFoods

4. The total mix variance combines with the total yield variance to equal the total efficiency variance
calculated in part 2. The direct materials mix variance of $880 F indicates that the actual product mix uses
relatively more of less-expensive ingredients than planned. In this case, the actual mix contains more peanuts
while using fewer dried cranberries, and only slightly more chocolate pieces. The direct materials yield
variance of $1700 U occurs because the amount of total inputs needed (11,000 cups) exceeded the budgeted
amount (10,000 cups) expected to produce 100 batches. The direct materials yield variance is significant
enough to be investigated. The mix variance may be within expectations but should be monitored since it is
favorable largely due to the use of fewer dried cranberries, which is considered an important element of the
product’s appeal to customers.
 7-41 (20–30 min.) Direct materials and manufacturing labor variances, solving nknowns.

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 (2,225 × $16.76) (2,225 × $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

7-42 (20 min.) Direct materials and manufacturing labor variances, journal entries

1.
Direct Materials:

Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
Wool (given) 3,500 $3.40 20013 $3.40
$9,000 $11,900 $8,840

$2,900 F $3,060 U
Price variance Efficiency variance
$160 U
Flexible-budget variance

Direct Manufacturing Labor:

Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
(given) 580 $9 200 3 $9
$5,520 $5,220 $5,400

$300 U $180 F
Price variance Efficiency variance
$120 F
Flexible-budget variance

2.
Direct Materials Price Variance (time of purchase = time of use)
Direct Materials Control 11,900
Direct Materials Price Variance 2,900
Accounts Payable Control or Cash 9,000

Direct Materials Efficiency Variance

Work in Process Control 8,840
Direct Materials Efficiency Variance 3,060
Direct Materials Control 11,900

Direct Manufacturing Labor Variances

 Work in Process Control 5,400
Direct Mfg. Labor Price Variance 300
Direct Mfg. Labor Efficiency Variance 180
Wages Payable or Cash 5,520

3. Plausible explanations for the above variances include that Zanella paid a little less for the wool,
but the wool was lower quality (more knots in the yarn that had to be cut out), and workers had to use
more of it. Zanella used more experienced workers in April than she usually does. This resulted in payment
of higher wages per hour, but the new workers were more efficient and took fewer hours than normal.
However, overall, the higher wage rates resulted in Zanella’s total wage bill being higher than expected.
7-43 (30 min.) Use of materials and manufacturing labor variances for benchmarking

1. Unit variable cost (dollars) and component percentages for each firm:

Firm A Firm B

DM $10.80 31.0% $ 9.45 25.5%

DL 11.20 32.2% 13.20 35.6%
VOH 12.80 36.8% 14.40 38.9%
Total $34.80 100.0% $37.05 100.0%

2. Variance analysis for Firm A using Firm B as the standard.

The Direct Materials Price Variance is computed as:

(Firm A Price – Firm B Price) × Firm A Usage

= ($4.80 - $5.25) × 2.25 oz.
= $1.0125 F

The Direct Materials Efficiency Variance is computed as follows:

(Firm A Usage – Firm B Usage) x Firm B Price

= (2.25 oz. – 1.80 oz.) × $5.25
= $2.3625 U

The Direct Labor Price Variance is computed as:

(Firm A Rate – Firm B Rate) × Firm A Hours

= ($14.00 – $11.00) × 0.80
= $2.40 U

The Direct Labor Efficiency Variance is computed as follows:

(Firm A Usage – Firm B Usage) × Firm B Rate

= (0.80 hrs. – 1.20 hrs.) × $11.00
= $4.40 F

3.
To: Controller
From: Junior Accountant
Re: Benchmarking & productivity improvements
Date: September 15, 2020

Benchmarking advantages
- We can see how productive we are relative to our closest competitor and the industry benchmark

- We can see the specific areas in which there may be opportunities for us to reduce costs
Benchmarking disadvantages
- Our closest competitor is targeting the market for high-end and custom-made lenses. I'm not sure
that looking at their costs helps with understanding ours better

- We may focus too much on cost differentials and not enough on differentiating ourselves,
maintaining our competitive advantages, and growing our margins

Areas to discuss
- We may want to find out whether the glass used by Firm B is of better quality since Firm B uses
less glass per lens. It pays more per oz. of glass than we do.

- We may want to analyze the wage rate we are paying our employees. We may be hiring higher
skilled labor because the labor efficiency variance is favorable compared to Firm B resulting in
lower labor cost per lens.

- It is interesting that the trade association benchmarks fall in between the various quantities and
prices for materials, labor and overhead.
7-44 (35 min.) Direct manufacturing labor variances: price, efficiency, mix and yield.

1.
George ($30 × 6 hrs.) $ 180
Earl ($20 × 4 hrs.) 80
Cost per guitar $ 260
Number of guitars × 25 units
Total budgeted cost $ 6,500

2. Solution Exhibit 7-44A presents the total price variance ($0), the total efficiency variance ($10 U), and
the total flexible-budget variance ($10U).

Total direct labor price variance can also be computed as:

Total direct labor price variance can also be computed as:

Direct labor price variance for each input = (Actual price − Budgeted price) × Actual quantity
George = ($30 – $30) × 145 = $0
Earl = ($20 – $20) × 108 = 0
Total direct labor price variance $0

3.

4. Solution Exhibit 7-44B presents the total direct labor yield and mix variances for Trevor Joseph
Guitars.
The total direct labor yield variance can also be computed as the sum of the direct labor yield variances
for each input:
George = (253 – 250) × 0.60 × $30 = 3 × 0.60 × $30 = $54 U
Earl = (253 – 250) × 0.40× $20 = 3 × 0.40 × $20 = 24 U
Total direct labor yield variance = $78 U

The total direct labor mix variance can also be computed as the sum of the direct labor mix variances for
each input:

George = (0.573 – 0.60) × 253 × $30 = 0.027 × 253 × $30 = $205 F

Earl = (0.427 – 0.40) × 253 × $20 = –0.027 × 253 × $20 = 137 U
Total direct labor mix variance = $68 F

The sum of the direct labor mix variance and the direct labor yield variance equals the direct labor
efficiency variance. The favorable mix variance arises from using more of the cheaper labor (and less of
the costlier labor) than the budgeted mix. The yield variance indicates that the guitars required more
total inputs (253 hours) than expected (250 hours) for the production of 25 guitars. Both variances are
relatively small and probably within tolerable limits. It is likely that Earl, who is less experienced,
worked more slowly than George, which caused the unfavorable yield variance. Trevor Joseph should be
careful that using more of the cheaper labor does not reduce the quality of the guitar or how customers
perceive it.