Managerial accounting Charles E. Davis Elizabeth Davis Performance Evaluation: Variance Analysis

Flexible Budgets: A Performance Evaluation Tool Variance Analysis: Direct Materials Variance Analysis: Direct Labor Variance Analysis: Overhead

Flexible Budgets: A Performance Evaluation Tool 1. What is a static budget? When is it prepared? 2. What is a favorable variance? An unfavorable variance? 3. What is management by exception? 4. What is a flexible budget? How does it differ from a static budget? 5. Describe the two components of the static budget variance.

Exercise 1 Rogers Sports sells volleyball kits that it purchases from a sports equipment distributor. The following static budget based on sales of 2,000 kits was prepared for the year. Fixed operating expenses account for 80% of total operating expenses at this level of sales. Sales revenue $100,000 Cost of goods sold (all variable) 60,000 Gross margin 40,000 Operating expenses 35,000 Operating income $ 5,000 Required Prepare a flexible budget based on sales of 1,500, 2,500, and 3,500 units.

Exercise 2 Refer to the data in Exercise 6-1. Assume that during the year Rogers Sports actually sold 2,100 volleyball kits during the year at a price of $48 per kit. Required Calculate the sales volume variance for sales revenue and cost of goods sold.

Exercise 3 Refer to the data in Exercise 6-1. Assume that during the year Rogers Sports actually sold 2,100 volleyball kits during the year at a price of $48 per kit. Required Calculate the sales price variance.

Problem 27 Barnes Entertainment Corporation prepared a master budget for the month of November that was based on sales of 150,000 board games. The budgeted income statement for the period is as follows.

Problem 27 During November, Barnes produced and sold 180,000 board games. Actual results for the month are as follows.

Problem 27 a. Prepare a flexible budget for November. b. Calculate Barnes’s static budget variance for November. c. Will the static budget variance that you calculated in part (b) be useful to management? Why or why not? d. Based on the available information, prepare a performance report for management. e. Comment on the results of your report.

  Unit 180,000 games Sales revenue $16.00 $2,880,000 Less variable expenses: Direct material 4.50 810,000 Direct labor 2.00 360,000 Variable overhead 3.00 540,000 Total variable expenses 9.50 1,710,000 Contribution margin $6.50 1,170,000 Less fixed expenses: Overhead 250,000 Selling and administrative expenses 500,000 Total fixed expenses 750,000 Operating income $420,000

Static Budget Variance   Actual Results Static Budget Variance Static Budget Unit Sales 180,000 30,000 F 150,000 Sales revenue $2,870,000 $470,000 F $2,400,000 Less variable expenses: Direct material 798,000 123,000 U 675,000 Direct labor 375,000 75,000 U 300,000 Overhead 550,000 100,000 U 450,000 Total variable expenses 1,723,000 298,000 U 1,425,000 Contribution margin 1,147,000 172,000 F 975,000 Less fixed expenses: 270,000 20,000 U 250,000 Selling and administrative 500,000 Total fixed expenses 770,000 750,000 Operating income $377,000 $152,000 F $225,000

Flexible Budget Variance   Actual Results Flexible Budget Variance Flexible Budget Sales Volume Variance Static Budget Unit Sales 180,000 30,000 F 150,000 Sales revenue $2,870,000 $10,000 U $2,880,000 $480,000 F $2,400,000 Less variable expenses: Direct material 798,000 12,000 F 810,000 135,000 U 675,000 Direct labor 375,000 15,000 U 360,000 60,000 U 300,000 Overhead 550,000 10,000 U 540,000 90,000 U 450,000 Total variable expenses 1,723,000 13,000 U 1,710,000 285,000 U 1,425,000 Contribution margin 1,147,000 23,000 U 1,170,000 195,000 F 975,000 Less fixed expenses: 270,000 20,000 U 250,000 Selling & administrative 500,000 Total fixed expenses 770,000 750,000 Operating income $377,000 $43,000 U $420,000 $195,000 F $225,000

Variance Analysis: Direct Materials 1. What is a direct materials price variance? 2. What is a direct materials quantity variance? 3. Define the standard quantity allowed. 4. In your own words, explain the standard quantity of tires allowed for eight bicycles. Why does your answer not depend on the number of bicycles expected to be produced? 5. Give two reasons why actual prices might differ from standard prices, resulting in a direct materials price variance. 6. Give two reasons why actual materials usage might differ from standard materials usage, resulting in a direct materials quantity variance.

Exercise 6 Washington WaterWorks manufactures snorkel gear. During the past month, Washington purchased 4,000 pounds of plastic to use in its dive masks, at a cost of $6,800. The standard price for the plastic is $1.60 per pound. The company actually used 3,800 pounds of the plastic to produce 15,000 dive masks. Required Calculate Washington’s direct materials price variance for the month.

Exercise 9 TechSolvers produces 8-foot USB cables. During the past year, the company purchased 500,000 feet of plasticcoated wire at a price of $0.25 per foot. The direct materials standard for the cables allows 8.5 feet of wire at a standard price of $0.23. During the year, the company used a total of 535,000 feet of wire to produce 63,000 8-foot cables. Required Calculate TechSolvers’ direct materials quantity variance for the year.

Exercise 13 The following information is available for Chad’s Chocolates: Actual production 2,800 boxes Budgeted production 3,200 boxes Direct Materials Standard 1.5 pounds of chocolate per box @ $8.00 per pound Actual 6,000 pounds purchased @ $7.70 per pound 5,040 pounds used @ $7.70 per pound Required a. Calculate the direct materials price and quantity variances. b. What might have caused the variances you calculated?