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Chapter 23: Q1CA (page 1323)
In 75 words or fewer, explain what a cost variance is and describe its potential causes.
Cost variance gauges how closely a business keeps its actual costs within the acceptable range.
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Preparing a flexible budget and performance report
This continues the Piedmont Computer Company situation from Chapter 22. Assume Piedmont Computer Company has created a standard cost card for the PCC model tablet computer, with overhead allocated based on direct labor hours:
Direct materials | \( 300 per tablet |
Direct labor | 3 hours per tablet at \)26 per hour |
Variable overhead | 3 hours per tablet at \(5 per hour |
Fixed overhead | \)54,000 per month |
During the month of September, Piedmont Computer Company incurred the following costs while manufacturing 1,100 PCC model tablets:
Direct material | \(341,000 |
Direct labor | 88,000 |
Variable overhead | 17,600 |
Fixed overhead | 56,320 |
Requirements
1. Prepare a flexible budget for September for 900, 1,000, and 1,100 PCC model tablets. The tablet has a standard sales price of \)675. List variable costs separately.
2. Using 1,000 PCC model tablets for the static budget, prepare a flexible budget performance report for September. Total sales revenue for the month was $767,800. The company sold 1,100 tablets.
3. What insights can the management of Piedmont Computer Company draw from the performance report?
Preparing a flexible budget performance report
Cell Plus Technologies manufactures capacitors for cellular base stations and other communication applications. The company’s July 2018 flexible budget shows output levels of 8,500, 10,000, and 12,000 units. The static budget was based on expected sales of 10,000 units.
Cell One Technologies | ||||
Flexible budget | ||||
For month ended July 31, 2018 | ||||
Budgeted amount per unit | ||||
Units | 8,500 | 10,000 | 12,000 | |
Sales revenue | \(24 | \)204,000 | \(240,000 | \)288,000 |
Variable expenses | 13 | 110,500 | 130,000 | 156,000 |
Contribution margin | 93,500 | 110,000 | 132,000 | |
Fixed expenses | 57,000 | 57,000 | 57,000 | |
Operating income | \(36,500 | \)53,000 | \(75,000 |
The company sold 12,000 units during July, and its actual operating income was as follows:
Cell One Technologies | |
Income statement | |
For the Month Ended July 31, 2018 | |
Sales revenue | \)295,000 |
Variable expenses | 161,100 |
Contribution margin | 133,900 |
Fixed expenses | 58,000 |
Operating income | $75,900 |
Requirements
1. Prepare a flexible budget performance report for July 2018.
2. What was the effect on Cell Plus’s operating income of selling 2,000 units more than the static budget level of sales?
3. What is Cell Plus’s static budget variance for operating income?
4. Explain why the flexible budget performance report provides more useful information to Cell Plus’s managers than the simple static budget variance. What insights can Cell Plus’s managers draw from this performance report?
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.
Question:Give the general formulas for determining cost and efficiency variances.
Question:How is the fixed overhead volume variance different from the other variances?
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