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Chapter 23: Q2RQ (page 1305)
Explain the difference between a favorable and an unfavorable variance.
Answer
Favorable variance is suitable for a business entity, while unfavorable variance is not suitable for the business entity.
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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?
Office Plus sells its main product, ergonomic mouse pads, for \(13 each. Its variable cost is \)5.10 per pad. Fixed costs are \(205,000 per month for volumes up to 65,000 pads. Above 65,000 pads, monthly fixed costs are \)250,000. Prepare a monthly flexible budget for the product, showing sales revenue, variable costs, fixed costs, and operating income for volume levels of 45,000, 55,000, and 75,000 pads.
Question:What is a standard cost income statement?
Question:Top managers of Marshall Industries predicted 2018 sales of 14,800 units of its product at a unit price of \(9.50. Actual sales for the year were 14,600 units at \)12.00 each. Variable costs were budgeted at \(2.00 per unit, and actual variable costs were \)2.10 per unit. Actual fixed costs of \(48,000 exceeded budgeted fixed costs by \)4,000.
Prepare Marshall’s flexible budget performance report. What variance contributed most to the year’s favorable results? What caused this variance?
Interpreting material and labor variances
Refer to your results from Short Exercises S236 and S237.
Requirements
1. For each variance, who in Martin’s organization is most likely responsible?
2. Interpret the direct materials and direct labor variances for Martin’s management.
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