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

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

3. 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.

4. 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) ,000
Gross margin ,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.

5. 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.

6. 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.

7. 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.

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

9. 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.

10. 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

11. 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

12. 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

13. 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.

14. 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.

15. 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.

16. 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 $8.00 per pound Actual 6,000 pounds $7.70 per pound 5,040 pounds $7.70 per pound Required a. Calculate the direct materials price and quantity variances. b. What might have caused the variances you calculated?

17. Variance Analysis: Direct Labor
1. What is a direct labor rate variance? 2. What is a direct labor efficiency variance? 3. Give two reasons why actual labor rates might differ from standard labor rates, resulting in a direct labor rate variance. 4. Give two reasons why actual labor hours might differ from standard labor hours, resulting in a direct labor efficiency variance.

18. Exercise 20
Hunter Family Instruments makes cellos. During the past year, the company made 6,400 cellos even though the budget planned for only 5,600. The company paid its workers an average of $15 per hour, which was $1 higher than the standard labor rate. The production manager budgets four direct labor hours per cello. During the year, a total of 24,320 direct labor hours were worked. Required a. Calculate the direct labor rate and efficiency variances. b. What might have caused the variances you calculated?

19. Variance Analysis: Overhead
1. What is a variable overhead spending variance? 2. What is a variable overhead efficiency variance? 3. What is a fixed overhead spending variance? 4. What are some possible explanations for the variable and fixed overhead spending variances? 5. Why would a company show a variable overhead efficiency variance?

20. Exercise 21
The following information is available for Harrison’s Hot Dogs:
Actual production 12,320 packages
Budgeted production 12,500 packages
Standard direct labor hours direct labor hours per package
Actual direct labor hours 19,500
Standard variable overhead rate $3 per direct labor hour
Actual variable overhead costs $50,000
Required
Calculate the variable overhead spending and efficiency variances.

21. Exercise 22
Ranger Sportswear planned to produce 40,000 fleece jackets in its Metairie, Louisiana factory. Fixed overhead costs for the factory were budgeted to be $500,000. The company actually spent $485,000 on fixed overhead and produced 38,000 jackets. Required Calculate the fixed overhead spending variance.

22. Exercise 26
Water Movers, Inc. is known throughout the world for its H2O-X high-capacity water pump, used in irrigation systems. The pump’s standard cost is as follows. The company’s predetermined fixed overhead rate is based on an expected capacity of 100,000 direct labor hours per month. Standard Price Standard Quantity Standard Cost Direct materials $6 per pound 15 pounds $ 90 Direct labor $9 per DLH 4 DLH 36 Variable overhead $8 per DLH 4 DLH 32 Fixed overhead $5 per DLH 4 DLH 20 $178 During the month of September, the company produced 22,000 of the 25,000 pumps that had been scheduled for production in the budget. The company used 382,000 pounds of material during September. The direct labor payroll for the month was $940,000 for 94,000 direct labor hours. Variable overhead costs were $740,000; fi xed overhead costs were $540,000. The company’s purchasing agent signed a new supply contract that resulted in purchases of 500,000 pounds of direct materials at a total price of $2,750,000. Required: Calculate Water Movers’ direct materials, direct labor, and overhead variances for September.