Concepts – iMSA503B
Organizational architecture (components and inter-relationships)
Spending variance
Efficiency variance
Activity variance
Sales price variance
Sales mix variance
Sales activity / quantity variance
Return on investment
Residual income
Strategic performance measurement system
Balanced scorecard
Performance measurement; issues; financial versus non-financial
Subjective performance information
Regression analysis
Qualitative considerations underlying regression analysis
Statistics (R-squared, t-statistics, p-value, etc.)
Decision making under uncertainty
Decision trees and specific components (decisions, states of nature, outcomes, probabilities)
Probability types (marginal, joint, conditional)
Value of imperfect information
Value of perfect information
9
Question #6 – Two Parts (15 points total)
Part A
The following standard costs per unit have been established by Fear, Inc.:
Material (3 kilograms at $2 per kilogram) $ 6.00
Direct labor (2 hours at $12 per hour) 24.00
During the month, Fear produced 1,100 units, which was 100 more units than planned.
They used 3,400 kilograms and 2,050 hours to do so.
Total actual materials spending was $6,460, while total actual labor spending was $27,675.
Required
Choose EITHER materials OR labor, and compute the following variances:
- Spending
- Efficiency
- Activity
Be sure to denote each variance as favorable or unfavorable.
10
You only needed to pick materials OR labor.
So, one of the following is required.
If they provided both, we grade only the first one they provided.
There may be some rounding issues; no points should be taken off if there are rounding
differences.
Materials
Actual St Pr Flexible Static
2.00 2.00 2.00
3.09091 3.00 3.00
1,100.00 1,100.00 1,000.00
6,460.00 6,800.00 6,600.00 6,000.00
340.00 (200.00) (600.00)
Spending Efficiency Activity
Labor
Actual St Pr Flexible Static
12.00 12.00 12.00
1.86 2.00 2.00
1,100.00 1,100.00 1,000.00
27,675.00 24,600.00 26,400.00 24,000.00
(3,075.00) 1,800.00 (2,400.00)
Spending Efficiency Activity
9 points for this problem; 3 points for each variance.
If there is an e
or that is central to a single item within the table that affects more than one
variance, then you should only take off 3 points (maximum), as the alternative would be double-
counting.
For instance, if the actual input number is calculated inco
ectly, then that affects both the spending
and efficiency variances.
Another example: the actual and standard volumes are reversed – this will affect every variance,
ut this type of e
or should not be “triple-counted” (i.e., take off 3 points).
11
Part B
Ma
les Company sells two products – Deluxe and Ultra.
The following information was gathered about the two products:
Deluxe Ultra
Budgeted sales in units 3,200 800
Budgeted selling price (unit) $ 300 $ 850
Actual sales in units 3,500 1,500
Actual selling price (unit) $ 325 $ 840
Required
Calculate the three main revenue variances for the Deluxe product.
Be sure to label the variances by name, as well as “favorable” or “unfavorable.”
If there is insufficient information to calculate any of the variances, please denote that clearly.
Deluxe
Actual Column 2 Flexible Static
325.00 300.00 300.00 300.00
0.70 0.70 0.80 0.80
5,000.00 5,000.00 5,000.00 4,000.00
1,137,500.00 1,050,000.00 1,200,000.00 960,000.00
87,500.00 (150,000.00) 240,000.00
Sales price Sales mix Sales volume/activity/quantity
Favorable Unfavorable Favorable
6 points for this part of the problem.
2 points for each variance; 1 for the number, 1 for the label and favorable/unfavorable distinction.
Materials and Manufacturing Labor Variances
Consider the following selected data regarding the manufacture of a line of upholstered chairs:
Standards Per Chair
Direct materials 2 square yards of input at $10 per square yard
Direct manufacturing labor 0.5 hour of input at $20 per hour
The following data were compiled regarding actual performance: actual output units (chairs)
produced, 20,000; square yards of input purchased and used, 37,000; price per square yard,
$10.20; direct manufacturing labor costs, $176,400; actual hours of input, 9,000; labor price per
hour, $19.60.
Required:
1. Show your computations of spending and efficiency variances for direct materials. Give
a plausible explanation of why the variances occu
ed.
Materials spending variance: $7,400 U
Materials efficiency variance: $30,000 F
2. Show your computations of price and efficiency variances for direct materials. Give a
plausible explanation of why the variances occu
ed.
Direct labor spending variance: $3,600 F
Direct labor efficiency variance: $20,000 F
Production Cost Variance Calculations
The following standard costs per unit have been established by Baldwin Company:
Material (6 pounds @ $.50 per pound) $ 3.00
Direct labor (1 hour @ $8 per hour) 8.00
Factory overhead (1 hour @ $5.50 per hour XXXXXXXXXX
Total Standard Cost per Unit $16.50
The $5.50 per direct labor hour overhead rate is based on normal capacity of 95 percent of
practical capacity. The following flexible budget information is provided:
Operating Levels
85% 95% 100%
Units of production
4,250
4,750
5,000
Standard direct labor hours 4,250 4,750 5,000
Variable factor overhead 8,500 9,500 10,000
Fixed factory overhead 16,625 16,625 16,625
During March the company operated at 85% capacity, producing 4,250 units of product which
were charged with the following standard costs:
Material (25,500 pounds @ $.50 per pound) $12,750
Direct labor (4,250 hours @ $8 per hour) 34,000
Factory overhead (4,250 hours @ $5.50 per hour) 23,375
Total Standard Cost $70,125
Actual costs incu
ed during March were:
Material (26,100 pounds) $11,745
Direct labor (4,150 hours) 34,445
Fixed factory overhead costs 16,625
Variable factory overhead costs 7,650
Total Actual Costs $70,465
Assume all the direct material purchased was used during the period.
Use the table on the following page to support your answers if you find it useful, or show your
work in another clearly labeled format.
a. Determine the following variances:
Price
Efficiency
Activity
direct material
$1305 F
$300 U
$1500 F
direct labor
$1245 U
$800 F
$4000 F
variable overhead
$650 F
$200 F
$1000 F
fixed overhead
$0
X
X
Make sure you record a number in each blank space. Indicate "favorable" or "unfavorable" for
each variance.
Standard Costing
Swan is a specialty chemical produced in batches. Normal denominator volume is 100 batches
per week. The weekly flexible budget for indirect costs (i.e., overhead) is $1600 plus $5 per
standard hour of direct labor. The company considers direct labor hours to be a reasonable cost
driver in this scenario.
Data for the week just ended are:
(1) Production amounted to 103 batches
(2) There were 315 hours of direct labor used, costing $2,472.
(3) The standards allow 3 hours of direct labor per batch
(4) Actual variable overhead for the week was $1,550
(5) Actual fixed overhead for the week was $3,700
Computations are shown first using tables, then formulas on the following page.
Actual
Activity
Standard
Input
Flexible
Budget
Master
Budget
Overhead
Applied
Variable
Overhead
$1550
315x$5 =
$1575
103x3x$5 =
$1545
100x3x$5 =
$1500
Same as flex
udget under
standard
costing
system
$25 F
activity efficiency spending
$30 U $45 U
$50 U
Overall variable overhead variance
Actual
Activity
Standard
Input
Flexible
Budget
Master
Budget
Overhead
Applied
Fixed
Overhead
$3700
NA
NA
$1600
103x
($1600/100)
= $1648
a. Calculate the following variances:
Variance
Variable Overhead
Fixed Overhead
Price/Spending
$25 F
$2100 U
Efficiency
$30 U
X
Activity
$45 U
X
Production
Volume
X
$48 F
Note that this problem shows a production volume variance – which we didn’t cover in class, so
you are not responsible for that information.
Variable overhead spending variance:
$1550 – (315x $5) = $25 F
Variable overhead efficiency variance:
(315 – 3 x 103)x$5 = $30 U
Variable overhead activity variance:
(103 – 100) x (3 x$5) - $45 U
$2100 U
Fixed overhead budget variance Production
volume
variance
(PVV)
$48 F
Fixed overhead budget variance:
$3700 - $1600 = $2100 U (just actual minus budgeted)
Fixed overhead production volume variance:
(103 – 100) x ($1600/100) = $48 F (just budgeted minus applied)
Illawa
a Office Equipment
The production report of Illawaa
a Office Equipment for April 1999 included the following
information pertaining to the manufacture of a line of tables:
Direct
Direct Manufacturing
Materials Labo
Budgeted spending $540,000 $360,000
Actual spending 672,000 396,000
Variance $132,000 U 36,000$ U
Actual price per unit of input (bd. ft., hr.) $14 $18
Standard price per unit of input $12 $20
Standard inputs allow per unit of output 5 2
Actual units of input 48,000 22,000
Budgeted units of output (product) 9,000 9,000
Actual units of output (product) 10,000 10,000
1. How much of the Direct Material and Direct Labor Variances are due to (a) price changes,
(b) usage efficiencies or inefficiencies, (c) activity level changes.
Materials Price: $96,000 U
Labor Price: $44,000 F
Materials Efficiency: $24,000 F
Labor Efficiency: $40,000 U
Materials Activity: $60,000 U
Labor Activity: $40,000 U
2. Give a plausible explanation for the performance.
As we discussed in class, there exist a number of plausible explanations for each of the above
variances.
Performance Evaluation of Investment Centers
When the Coronet Company formed three divisions a year ago, the president told the division
managers that an annual bonus would be paid to the most profitable division. However,
absolute division operating income as conventionally computed would not be used. Instead, the
anking would be affected by the relative investments in the three divisions. Options available
include ROI and residual income, and variations of each. Investment can be measured using
gross book value or net (of straight-line depreciation) book value. Each manager has now
written a memorandum claiming entitlement to the bonus. The