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Chapter 23: Q17RQ (page 1305)
Question:What is management by exception?
Answer
The management by exception is a tool that helps the management to focus on significant issues.
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Preparing a flexible budget computing standard cost variance
Morton Recliners manufactures leather recliners and uses flexible budgeting and a
standard cost system. Morton allocates overhead based on yards of direct materials.
The company’s performance report includes the following selected data:
Static Budget Actual Results (1,000 recliners) (980 recliners) |
Sale (1,000 recliners \(505 each) \) 505,000 (980 recliners \(480 each) \) 470,400 |
Variable Manufacturing Costs: Direct Materials (6,000 yds. @ \(8.60/yd.) 51,600 (6,143 yds. @ \)8.40/yd.) 51,601 Direct Labor (10,000 DLHr @ \(9.20/DLHr) 92,000 (9,600 DLHr @ \)9.30/DLHr) 89,280 Variable Overhead (6,000 yds. @ \(5.20/yd.) 31,200 (6,143 yds. @ \)6.60/yd.) 40,544 |
Fixed Manufacturing Costs: Fixed Overhead 60,600 62,600 Total Cost of Goods Sold 235,400 244,025 |
Gross Profit \( 269,600 \) 226,375 |
Requirements
1. Prepare a flexible budget based on the actual number of recliners sold.
2. Compute the cost variance and the efficiency variance for direct materials and for direct labor. For manufacturing overhead, compute the variable overhead cost,variable overhead efficiency, fixed overhead cost, and fixed overhead volume variances. Round to the nearest dollar.
3. Have Morton’s managers done a good job or a poor job controlling materials, labor, and overhead costs? Why?
4. Describe how Morton’s managers can benefit from the standard cost system.
Briefly describe how journal entries differ in a standard cost system.
Question:Use the following information to prepare a standard cost income statement for Mitchell Company for 2018.
Cost of Goods Sold (at standard) \( 366,000
Direct Labor Efficiency Variance \) 19,500 F
Sales Revenue (at standard) 570,000
Variable Overhead Efficiency Variance 3,300 U
Direct Materials Cost Variance 7,200 U
Fixed Overhead Volume Variance 12,500 F
Direct Materials Efficiency Variance 2,700 U
Selling and Administrative Expenses 71,000
Direct Labor Cost Variance 42,000 U
Variable Overhead Cost Variance 1,700 F
Fixed Overhead Cost Variance 2,100 F
Drew Castello, general manager of Sunflower Manufacturing, was frustrated. He wanted the budgeted results, and his staff was not getting them to him fast enough. Drew decided to pay a visit to the accounting office, where Jeff Hollingsworth was supposed to be working on the reports. Jeff had recently been hired to update the accounting system and speed up the reporting process.
“What’s taking so long?” Drew asked. “When am I going to get the variance reports?” Jeff sighed and attempted to explain the problem. “Some of the variances appear to be way off. We either have a serious problem in production, or there is an error in the spreadsheet. I want to recheck the spreadsheet before I distribute the report.” Drew pulled up a chair, and the two men went through the spreadsheet together. The formulas in the spreadsheet were correct and showed a large unfavorable direct labor efficiency variance. It was time for Drew and Jeff to do some investigating.
After looking at the time records, Jeff pointed out that it was unusual that every employee in the production area recorded exactly eight hours each day in direct labor. Did they not take breaks? Was no one ever five minutes late getting back from lunch? What about cleanup time between jobs or at the end of the day?
Drew began to observe the production laborers and noticed several disturbing items. One employee was routinely late for work, but his time card always showed him clocked in on time. Another employee took 10 to 15minute breaks every hour, averaging about 1 hours each day, but still reported eight hours of direct labor each day. Yet another employee often took an extra 30 minutes for lunch, but his time card showed him clocked in on time. No one in the production area ever reported any “down time” when they were not working on a specific job, even though they all took breaks and completed other tasks such as doing cleanup and attending department meetings.
Requirements
1. How might the observed behaviors cause an unfavorable direct labor efficiency variance?
2. How might an employee’s time card show the employee on the job and working when the team member was not present?
3. Why would the employees’ activities be considered fraudulent?
Headset manufactures headphone cases. During September 2018, the company produced 106,000 cases and recorded the following cost data:
Standard Cost Information
Quantity | Cost | |
Direct Materials | 2 parts | \( 0.16 per part |
Direct Labor | 0.02 hours | 8.00 per hour |
Variable Manufacturing Overhead | 0.02 hours | 11.00 per hour |
| Fixed Manufacturing Overhead (\)30,720 for static budget volume of 96,000 units and 1,920 hours, or \(16 per hour) | ||
Actual Information
Direct Materials (209,000 parts @ \)0.21 per part) \( 43,890 Direct Labor(1,620 hours @ \)8.10 per hour) 13,122 Variable Manufacturing Overhead 9,000 Fixed Manufacturing Overhead 30,000 |
Requirements
1. Compute the cost and efficiency variances for direct materials and direct labor.
2.For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances.
3. Headset’s management used betterquality materials during September. Discuss the tradeoff between the two direct material variances.
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