CHAPTER 8 BUDGETARY CONTROL AND VARIANCE ANALYSIS ‘TRUE/FALSE 1. Ifsales volume exceeds expectations, actual profit will always be higher than budgeted profit. LO1—False Actual profit may be lower than budgeted profit even though sales volume exceeds expectations. 2. Variance analysis. may be performed to isolate the profit impact of individual input and output factors. 101—True 3. Variance analysis is a technique used for determining the profit effect due to differences between the actual and budgeted size of the market for a product. LO1—False Variance analysis is a technique for determining why actual revenues, costs, and profit differ fram their budgeted amounts. 4. For most organizations, a budget is the benchmark for evaluating actual performance. 101 —True 5. Agood plan is the foundatian for effective control. 101 —True 6. The input quantity variance is also referred to as the input efficiency variance because it captures the efficiency of input resource use. 102 —True 7. _Avariance is the difference between a budgeted amount and a forecasted amount. LO2—false —Avarianee is the difference between an actual result and a budgeted amount. 8. Any profit difference between the master and flexible budgets is due solely to the difference between budgeted and actual sales. Lo2—True ‘9. Total Profit Variance = Actual Profit Master Budget Profit. 102—True 10. Sales Volume Variance = (Actual Sales Quantity ~ Budgeted Sales Quantity} x Actual Unit Contribution Margin 102—False Sales Volume Variance = (Actual Sales Quantity — Budgeted Sales Quantity) x Budgeted Unit Contribution Margin} 11, Abudget reconciliation is a report that uses variances to reconcile the difference between master budget profit and actual profit. 103 —True BaBalakrishnan/Managerial Accounting, 2e 112. If a materials input price is higher than budgeted, the result is an unfavorable materials efficiency variance. L03—False If an input price is higher than budgeted, the result is an unfavorable materials price variance. 13. Small variances probably indicate random factors at work while large variances could signal a Permanent change in the operating environment. 103 True. 14. Cast variance analysis in a single-product company differs significantly from a multi-praduct, ‘company. L03-False—_ Weccalculate and interpret all ofthe cost variances in a multi product firm exactly as we ‘would for a single product firm. 15. Cheaper ingredients lead to a favorable price variance, but also may lead to unfavorable quantity variances, 103 -True 16. The primary limitations of variance analysis pertain to relevance and feedback. L04—False The primary limitations of variance analysis pertain to timeliness and specificity. 17. The lack of timeliness and specificity in financial variances force organizations to use primarily non financial contrals to ensure that they are meeting organizational objectives. 104—True 118, Many firms use process control charts and statistical control methods to help employees track performance on a real-time basis. 104 True 19. In a process control chart, abservations outside the control limits are likely due to random. fluctuations. LO4—False In a process control chart, observations outside the control limits likely indicate a significant change, and trigger an investigation. 20. In general, financial controls are more useful for evaluating managers at higher levels in an organizational hierarchy, while nan financial controls are more useful in manitering and evaluating ‘employees at lower levels. 104—True 21. Organizations always compute the materials price variance using the actual quantity of materials used. Appendix A False Many organizations compute the materials price variance using the actual quantity of materials purchased rather than the actual quantity of materials used. 22. The materials price variance helps recancile actual profit with master budget profit. Appendix A —True‘Budgetary Control and Variance Analysis 23. A favorable or unfavorable sales volume variance could arise due to a change in the market as 3 ‘whole or the firm's share of the market. Appendix B- True 28. The market share variance holds market share constant while examining variations between budgeted and actual market size. Appendix B—False The market share variance holds market size constant while examining variations between budgeted and actual market share. 25. The sales mix variance and the sales quantity variance together add up ta the sales volume variance. ‘Appendix C-True 26. The sales mix variance tells us the effect of the aggregate change in sales quantity, halding the sales mix at the budgeted level. ‘Appendix C- False The sales mix wariance captures the profit effect of changes in the sales mix from the budgeted level. 27. For the flexible budget, we calculate the weighted unit contribution margin using alll the budget ascumptions of the master budget except sales volume. Appendix C—True 28. Ina single-product case, the weighted unit contribution margin in the master budget will always be higher than in the flexible budget, ‘Appendix C— False In the single-product case, the WUCM in the master and flexible budgets is identical because we have only one product.Balakrishnan/Managerial Accounting, 2c MULTIPLE CHOICE 29. Without a well-conceived plan against which to compare actual performance: A. tis difficult to determine how a company's doing. B. Its difficult to determine what a company could do to improve. © _Acompany will not be able to make a profit. 1D. Both Aand 8. E AB,andC. to1-p 30. The starting point for preparing a manthly budget is: A. Projecting sales. B. Projecting production. Projecting cash inflows. D. Projecting cash outflows. E__ Projecting material needs. to1-A 31. The purpose of creating a flexible budget s to: A. Determine how mueh of the difference between actual and budgeted profits was due strictly to the difference between budgeted and actual sales. 'B._ Determine how much of the difference between actual and budgeted profits was due strictly to tthe difference between budgeted and actual variable costs. . Determine how much of the difference between actual and budgeted profits was due strictly ta tthe difference between budgeted and actual fixed casts. 1D. Determine which department is responsible for the overall budget variance. 101 -Selftest—A 32. The controller for Navia, Inc. created a budget prior to the eurrent period. At the end of the period, the controller compared the budget with the actual results, For what purpose is the cantroller using budgets? A. Coordination B. Control ©. Variances D. Planning 101 — Pre-test—B 33. Which af the following is mat a component of the total profit variance? ‘Sales volume variance. ‘Flexible budget variance. ‘Sales price variance. Market size and share variance. All af the above are components af the total profit variance. LM SO PE‘Budgetary Control and Variance Analysis 34, Which of the following statements is not true? factual sales are greater than budgeted sales, the result is a favorable variance. actual cost is greater than budgeted cast, the result is an unfavorable variance. Ifbudgeted sales are greater than actual sales, the result is an unfavorable variance. IFbudgeted cost is greater than actual cost, the result isan unfavorable variance, factual cost is less than budgeted cast, the result is a favorable variance. ren ep 35. Given the following data, calculate total profit variance. Master Budget Actual Results Revenue $73,000 $75,000 Variable costs $23,000 $20,000 ‘Contribution margin $50,000 $55,000 Fixed costs $15,000 $10,000 Profit before taxes $35,000 $45,000 A. $2,000 Favorable. 8. $2,000 Unfavorable. C. $10,000 Unfavorable. 1D. $10,000 Favorable. $5,000 Favorable. to2-D 36. The two major components of the total profit variance are: ‘Sales volume variance and flexible budget variance. B. Price variance and quantity variance. €. Sales volume variance and sales mix variance. D. Flexible budget variance and quantity variance. (None of the above. 102 > 37. The formula for the sales volume variance is: ‘A. {Actual Sales Quantity ~ Budgeted Sales Quantity) x Actual Unit Contribution Margin 1B. (Budgeted Sales Quantity — Actual Sales Quantity) x Total Profit Variance C. Flexible Budget Profit— Master Budget Profit. 1D. (Budgeted Sales Quantity - Actual Sales Quantity) + Total Profit Variance E._(Actual Sales Quantity ~ Budgeted Sales Quantity) + Actual Unit Contribution Margin toa—c 38. If the labor efficiency variance is $1,000unfavorable, then: A. Budgeted labor rate exceeded actual labor rate. B. Actual labor rate exceeded budgeted labor rate, C._ Budgeted labor input exceeded actual labor input. 1D. Actual labor input exceeded budgeted labor input. E. None of the above, 1o2-DSalakrishnan/Manogerial Accounting, 2e 39. Variance analysis is an important tool because: A. Ithelps management determine where bottlenecks in the production process occurred B. Ithelps management determine better pricing strategies ._Ithelps management determine why actual profits varied from budgeted profits D. Ithelps management determine which department operated most efficiently. LO2~ Self-test—C 40. A favorable materials price variance will occur when: ‘A. Actual casts of materials were less than budgeted B. More material was used than was budgeted CC. Actual cost of materials were greater than budgeted D.. Less material was used than was budgeted Lo2—Self-test—A 41. The formula for calculating an input price variance is: ‘AL (Actual volume less budgeted volume) x actual price. B. (Budgeted volume less actual volume) x budgeted price. C._ (Budgeted price less actual price) x actual volume, D. (Actual price less budgeted price) x budgeted volume, LO2— Self-test—C 42. Which of the fallawing would not result in a variance from budget: ‘A. Amachine breaks down. B. Budgets are set ina manner making them difficult to achieve. . Asupplier raises prices. D. The Chief Executive Officer takes a week of vacation. LO2— Self-test—D 443, Sales commissions for the Grant Company are budgeted based on 3 percent of sales. The sales department budgeted sales of $150,000 for total commissions of $4,500. If aetual sales totaled $170,000 the flexible budget will show total commissions of: A. $24,500 8B. $5,100 c. $4,500 D. $15,500 LO2— Self-test—B 44. The Farmington Company has a flexible budget based on direct labor hours. At the 100,000 hours level, the budget shows the following variable overhead costs: Indirect materials $16,000 Indirect labor $44,000 [At an activity level of 120,000 hours, total variable costs will be: A. $18,200 8. $60,000 c $52,800 . $72,000 LO2—Self-test—DBudgetary Control and Variance Analysis 45. Jackie's Jewelry Company reported the following budgeted and actual results based on sales of 100 units of product: Flexible Budget “Asif Budget Actual Results Direct Labor $800, $700" $850 Direct Materials $400 $aso $450 Overhead: $600, $600 $610 ‘The company’s total input quantity variance is: A. $50 favorable. 8, $160unfavorable, C. $150 favorable. D. $50 unfavorable. LO2 -Self-test—A 46. The following material budgets have been developed for the Criders Company. Price per pound $6.50 Pounds per unit 1 Purchase price varianee $3,200 unfavorable the company purchased 16,000 units, the actual price per pound of material purchased must have been A $6.70 B. $5.00 $630 ©. $5.90 LO2—Selftest—A 47. For what purpose isa flexible budget used? A. To provide various passible outcomes for management to consider. B. Toadjust input prices so that future variances are eliminated. To insure that profit does not drop below a predetermined level. D. Toidentify the sources af variances. LO2 —Pretest -D 48. Which af the following items would differ in amaunt when comparing the master and flexible budgets for a freight company in which actual sales resulted in $2,500,000 based on 8,000 shipments during a period that 7,800 shipments were budgeted? A. Total sales revenue. B. Equipment costs. C Rent. D. All of the above wil differ. LO? —Pretest—A a7Balakrishnan/Manage ial Accounting, 2 49. PVC Pro produces PVC pipe in 12 foot lengths. The fallawing information was provided concerning its labor and materials ‘4,650 Ibs. @ $7.00 per pound 7,450 hrs. costing $80,460 0.40 lb. @ $7.10 per pound How much is the materials price variance? A. $1,530F B. $465 F C $1,050F D. $1,065 F LO2—Pre-test—B 50. Cico Buckets had budgeted unit sales of 41,600 buckets, Actual sales during May totaled 42,000 buckets at $4.25 per bucket. Its budgeted sales price was $4.00 per bucket: The master budget contribution margin totaled $62,400 and the budgeted variable cost per unit was $2.50. How much is Haslo's sales volume variance? A 3600 F B. $100F C. $1,600F D. $1,700F L02—Pre-test—A 4. The Parsans Company has budgeted to capture 25% af the market in which they operate which currently contains 1,000 stores. The budgeted contribution margin per unit sold is $4.50. if they were actually able to capture only 20% of the market, but their actual contribution margin was $5.00 per unit, their market share variance was: A. $250 favorable B. $225 unfavorable $250 unfavorable D. $225 favorable Lo2—Selftest—B 52. Variances could arise: A. During the normal course of operations because a machine unexpectedly breaks down. B. Because of a permanent change in the firm’s operating, enviranment such as a competitor introduces a new product. ‘Because budgets or standards are either too tight or too loose. Both AandB. A.B,and C. ipsaBudgetary Control and Variance Analysis '53. Which af the following is not a general rule ta follow in a variance investigation? Adjust budgeted amounts to agree with actual amounts. B._ Investigate all significant variances, whether favorable or unfavorable, C Bamine trends. D. Consider the total picture. £. Allofthe abave are general rules to follow. 103-A > 'S4. Which of the following trends in variances may not indicate an inherent problem? ‘Marketing personne! overstating costs to give themscives additional leeway in operations. Repeatedly having unfavorable labor efficiency variances. ‘An unexpected increase in demand. ‘Adeveloping problem in the manufacturing process. Finding mostly favorable variances aver time. mene '5S. The primary limitations of variance analysis pertain to Controllability and budgeting. Timeliness and specificity. Timeliness and controllability. Controllability and specificity. ‘Budgeting and controllability, renee 103-8 56. Which of the following is a method firms used ta help track employee performance-an a real-time ! i 103-8 57. Firms use non-financial measures to: ‘A. Identify problems with their processes. B. Help align goals. ©. Provide on-going feedback to employees. D. Evaluate employees. E. Allof the above. 1o3-EBalakrishnan/Manogerial Accounting, 2e 8. In general, non-financial cantrots are more useful than financial controls for: ‘A. Monitoring employees at lower levels, B._ Evaluating workers at lower levels. C. Evaluating managers at higher levels. D. Both AandB. E AB,andc. Lo3-D 59, Acompany may experience 2 favorable labor rate variance but an unfavorable labor efficiency variance when: ‘A. Sales lagged behind the budgeted amounts of the sales department. B. There were breakdowns in machinery. C. The product mix changed during the period. D. The company experienced a high amount of turnover in its workforce. LO3 — Self test -D 60. A'spending variance results when there is a difference between actual and budgeted: A. Fixed costs. B. Variable costs C. Sales Revenue D. Unit sales 103 — Self test— A 61. Thurston Company's budget allows for one pound af material to be used for each unit produced. ‘The budget indicates that the material costs $2.50 per pound. Actual units produced totaled 8,000. ‘The company used a total of 8,200 pounds of material at an actual cost of $2.40 per pound. There were no beginning or ending inventories of raw materials. The input price and input quantity variances, respectively, would be: Input Price Input Quantity A. Favorable Favorable B. Unfavorable Favorable Unfavorable Unfavorable D. Favorable Unfavorable 103 —Self-test—D 62, Asales mix variance: A. unfavorable, indicates that a greater percentage of products with higher contribution margins are being sold than were budgeted. BB. Indicates which products are having a negative impact on profits. C._ Reports the effect on profits due to a change in the sales mix from the master budget. D._ Reports the effect on profits due to an averall change in sales quantity. LO3 ~ Self-test—C 840Budgetary Control and Variance Analysis 63. Which of the following would lead to a variance resulting from a permanent change in a firms ‘perating environment? 5 nap ‘An abnormally high incidence of employees calling in sick during a period. ‘Anew competitor entering the market. Upper level management failing: ta consult lower level workers and instituting extremely tight ‘budgetary controls. ‘Acaitical machine unexpectedly breaking dawn for a number of days. 103 —Pre-test—B 64. In comparison to financial measures, nonfinancial measures tend to be? a 8. c D. Less timely, less specific. More timely, less specific. More timely, more specific. 104 Pretest-D 65. Using the following data, calculate the purchase price variance for Rizzo Company. Budgeted quantity per unitof output —S yards Budgeted price per yard $1800 rds purchased 8,000 yards ‘Actual eost of material purchase $140,000 Material used in production 8,500 yards ‘A. $13,000 Favorable. B. $4,250 Favorable. $4,000 Favorable. ©. $2,000 Unfavorable. E. Noneof the above. Appendic A —€ 66. Using the following data, calculate the sales volume variance for Rizzo Company. ‘Actual sales quantity 5,000 units Budgeted sales quantity 5,500 units ‘Budgeted sales price per unit $10 Budgeted unit contribution margin $6 A. $3,000 Favorable. 8, $3,000 Unfavorable. CC. $5,000 Favorable. D. $5,000 Unfavorable. E. Nonesofthe above. ‘Appendix BB auBalakrishnan/Managerial Accounting, 2e 67. Given the following data, what is the sales mix variance for Rizzo Company? Tmpne> ‘Actual total sales $775 Budgeted total sales $7,500 ‘Weighted unit contribution margin in the flexible budget $12 ‘Weighted unit contribution margin in the master budget ss 200 Favorable. 200 Unfavorable. 29,900 Favorable. 29,900 Unfavorable. 300 Unfavorable.Budgetary Control and Variance Analysts Problems 1. Fancy Feast Bakery makes cakes for special occasions. Fancy Feast estimates the following, revenue and casts for the upcoming month. Expected sales 300 cakes @ $20 per cake Expected cast of ingredients $4 per cake Expected labor costs $20 per hour Estimated labor hours required Y%hour per cake Estimated variable overhead $1 per baker hour Estimated total fixed costs: Rent $250 Equipment costs $1,000 Cake Delivery costs $150 Required: Prepare the Master Budget for Fancy Feast.Balakrishnan/Managerial Accounting, 2e 2. Avariance is the difference between an actual result and a budgeted amaunt. Variance analysis. helps organizations determine whether their people and processes are performing as expected. Required: Enter the identifying letters in the blanks below to indicate the term that best matches each description. ‘A. Favorable variance F. Sales price variance B. Hlexible budget G. Sales volume variance Input price variance H. Spending variance D. input quantity variance 1 Total profit variance Master budget J. Variance analysis, ‘The difference between actual profit and master budget profit. Profit effect associated with the difference between the budgeted and actual price of an input. Technique for determining why actual revenues, costs, and profit differ from thelr budgeted amounts. {A difference between an actual result and a budgeted amount that leads to.an increasein profit. ‘The difference in profit between the flexible budget and the master budget. ‘A budget for the actual level of sales, retaining all other plan assumptions in the master budget. The difference between actual revenues and flexible budget revenues. The budget as prepared at the start of the accounting period. “The difference between budgeted foved casts and actual fixed costs. Profit effect associated with the difference between the budgeted and actual input quantity used.Budgetary Control and Variance Analysis 3. Piney Creek Manufacturing Company produces high-end extreme weather tents. Piney Creck has established the following budget far producing its XWT madel for the mast recent month, Master Budget Actual Results Number of tents sald 50 60 ‘Sales price per tent $650 $635 Variable cast per tent $250 $240 Fixed costs $10,000 $10,000 Required: a. What is Piney Creek’s total profit variance for the most recent month b. Calculate Piney Creek's sales volume variance for the month. . Calculate Piney Creek’s sales price variance for the month. 4. Cagle Manufacturing makes extreme weather coveralls. Eagle's budget called for 5 yards of fabric at.a cost of $12 per yard per unit. Actual production of 200 coveralls required 1,200 yards of fabric at an actual cast of $11 per yard. Required: a. Calculate the material price variance. b, Calculate the quantity variance.Balakrichnan/Managerial Accounting, 2e 5. Hester and Gann, CPAs have a suscessful practice specializing in tax planning and preparation. The firm, in addition to the two partners, employs 32 professional staff and 5 administrative assistants. Hester and Gann do monthly variance analysis ta keep apprised of excess labor casts. ‘or materials costs (printing, software costs, cte.). However, the partners believe that inereasing employee morale and providing some extra incentives might increase productivity and decrease errors. Required: a. What kinds of controls might Hester and Gann implement to decrease errors? What kind of financial incentives might Hester and Gann implement to increase productivity? c. What kind of non financial incentives might Hester and Gann implement to increase productivity? ‘6. For the current month, Silversmith’s Cutlery shop budgeted sales of 300 knives based on capturing a 20% share of the market, estimated at 1,500 knives, The actual sales volume was 319 knives representing a 22% share of the market of 1,450 knives. Silversmith’s budgeted contribution margin per knife was $8. Required: a, Calculate Silversmiths sales volume variance. b, Calculate Silversmith’s market share variance. Calculate Silversmith’s sales volume variance.Budgetary Control and Variance Analysis Solutions to Problems 1. Master Budget (LO1) Fancy Feast Bakery Master Budget Revenue (300 cakes @ $20) $6,000 ‘Variable casts (300 cakes) Ingredients (300 @$4) $1,200 Labor 3,000 Overhead 150 4.350 ‘Contribution margin $1,650 Fixed costs Rent $250 Equipment costs 1,000 Cake delivery costs 150 1,400 Profit before taxes $250 2. Terms {LO2, LO2, LO3) ‘The difference between actual profit and master budget profit. Profit effect associated with the difference between the budgeted and actual price ‘of an input. ‘Technique for determining why actual revenues, costs, and profit differ from their budgeted amounts. ‘Adifference between an actual result and a budgeted amount that leads to an increase in profit. ‘The difference in profit between the flexible budget and the master budget. ‘Abudget for the actual level of sales, retaining all other plan assumptions in the master budget. ‘The difference between actual revenues and flexible budget revenues. ‘The budget as prepared at the start af the accounting period. ‘The difference between budgeted fixed casts and actual fived costs. Profit effect associated with the difference between the budgeted and actual input quantity used. a7Balakrishnan/Managerial Accounting, 2e 3. Calculating and interpreting sales variances (LO1, LO2, L03) Master Budget Flexible Budget Actual Results Revenue Revenue Revenue (50x $650) $32,500 (60 x $650) $39,000 (60x $635) $38,100 Variable casts Variable costs Variable costs (50x $250) 12,500 (3605250) 15,000 (60x $240) 14,400 Contribution Contribution Contribution margin 20,000 margin 24,000 margin 23,700 Fixed costs: 10,000 Fixed costs 10,000 Fixed costs 10,000 Profit before taxes. $10,000 Profitbeforetaxes $14,000 Profitbefore taxes $13,700 a. Total profit variance = Actual profit ~ Master budget profit, Total profit variance = $13,700 - $10,000 = b. Sales volume variance = Flexible Budget Profit— Master Budget Profit ‘$14,000 - $10,000 = $4,000 Favorable ¢. Sales price variance = Actual Revenue ~ Flexible Budget Revenue ‘$38,100 - $39,000 = $900 Unfavorable. 4, Materials price and quantity variance (LO2) a. Material price variance = (Actual price~ Budgeted price) x Actual quantity ($21 - $12) 1,200 1,200 F 'b. Quantity variance = (Actual quantity ~ Budgeted quantity) x Budgeted price (2,200—1,000) x $12 = $2,400 U[Budgetary Control and Variance Analysis 5. Choosing performance measures (LOA) a. Controls to decrease errors: Answers may vary. Several possible controls include: ‘+ Gstablish mentarship for new professional staff which includes methads of helping staff minimize errors. ‘© Hold periodic training on technical matters. ‘+ Hold periodic training on saftware to insure that the staff is fully utilizing, features that help minimize errors. ‘+ Set up teams to give weaker or new staff a tool for improvement. ‘© Establish consequences when errors are unreasonably high. 1b. Financial incentives to increase productivity: ‘Answers may vary. Several possible incentives include: Establish cash rewards for individual levels of productivity. Establish pay-raise standards for levels of productivity. Establish bonus plans for teams. Establish cash rewards for team productivity. eae Non-financial incentives to increase productivity: Answers may vary. Several possible incentives include: Provide timely feedback to staff on productivity. Establish consequences for non-praductivity. Establish rewards for the fewest errors (one day off, special parking, Provide time management training sees 6. Sales Volume, Market Size and Market Share Variances (App B) Sales volume variance. (Actual sales quantity ~ budgeted sales quantity) x Budgeted unit contribution mangin (819 ~ 300) x $8 = $152 F Market share variance. ‘Actual market size x (Actual market share ~ budgeted market share) x budgeted unit ‘contribution margin 4,450 x (.22 - 20} x$8 =$232F ‘Sales volume variance. (Actual market size— Budgeted market size) x Budgeted market share x budgeted unit ‘contribution margin. (0,450 ~ 1,500) x 20x $8=$80UBalakrishnan/Managerial Accounting, 2e End of Chapter Content Shor Answer 11. For many organizations, what is the benchmark for evaluating actual performance? 2. What isa master budget? 3. What isa variance? 4. What does it mean when a variance is favorable? What does it mean when a variances unfavorable? S. What is the total profit variance? 6. What two subsidiary variances make up the total profit variance? 7. What isa flexible budget? 8. What is the sales volume variance? 9. What is the flexible budget variance? What three subsidiary variances make up the flexible budget varianee? 10. Whats the sales price variance? ‘11. What is the fixed cost spending variance? 112. Each variable cost variance can be decomposed into two variances. What are these variances? 13. What is an input price variance? 14, What is an input quantity variance? 15. What is the function of a budget-recanciliation report? 16. What are the three primary reasons variances occur? 17. What are the three main rules to follow when conducting a variance investigation? 18. What are the two primary reasons organizations use nonfinancial measures in addition to financial measures for control purposes?‘Budgetary Control and Variance Analysis, Solutions to Short Answer 1, (LO-1) Many organizations use a budget as a benchmark for evaluating actual performance. 2. (LO.1) —Aplan that represents the expected revenues, costs, and profit corresponding to the expected sales volume as of the beginning of the period. 3. (102) The difference between an setual result and a budgeted amount is called a variance. 4, (10.2) favorable variance means that performance exceeded expectations — actual revenue exceeded budgeted revenue or actual cost was less than budgeted cast. An unfavorable variance ‘means that performance fell short of expectations ~ actual revenue was less than budgeted revenue or actual cost exceeded budgeted cost. 5. (10.2) The total profit varianee equals actual profit less master budget profit. 6. (10-2) The sales valume variance and the flexible budget variance. 7. (102) The budget at the actual level of sales. 8 (10.2) The difference in profit between the flexible and master budgets. 9. (10-2) The difference in profit between the actual results and the flexible budget. It is comprised of the sales price variance, the fixed cost variance, and the variable cost variance. 10. {L0:2) The difference between actual revenues and flexible budget revenues. 11. (102) The difference between budgeted and actual fixed costs. 12. (10-2) Aquantity variance and a price variance. 13, (10-2) The difference between the “as i” budget and actual results for an input. 14, (L0:2) The difference between the flexible budget and the “as if” budget for an input. 15. (LO-3)__It provides management with a summary that bridges actual and expected performance. helps pinpoint which areas to investigate in order ta take appropriate corrective actions. 16. (L0-3) Variances could arise (1) during the normal course of operations, (2) more permanent change in the firms operating environment, and (3) budgets/standards are too tight or too loose. 17. (LO-3) (1) Investigate all significant variances, whether favarable or unfavorable, (2) Examine trends, and (3) Consider the total picture. (LO-4) (1) Timeliness, and (2) Specificity.Balakrishnan/Managerial Accounting, 2e Short Essay 11. Each of us regularly uses budgets and benchmarks to evaluate how we are doing or what we could do to improve. Can you list three examples from everyday life? 2. Some argue that making the master budget hard to achieve or “tight” can help eliminate waste and make organizations more efficient. Others argue that master budgets shauld be “loose” because they provide room far discretion in decision making. What do you think? 3. List some examples of variances that you calculate in everyday life? Think about getting a test back or analyzing other peaple’s actions (c.g., we often say things like “I can’t believe they did that!”). Do you think “variances” influence the behavior of animals such as family pets? What does this say: about the widespread use of variance analysis? When will the sales volume variance be unfavorable? When will the sales price variance be unfavorable? ts it possible to have an unfavorable sales volume variance and an unfavorable sales rice variance? 5. Ifthe sales volume variance is favorable, does this imply that for inputs such as materials and labor, the actual quantity of the input used will be greater than the flexible budget quantity of the input? Why or why not? 6. When will the materials price variance be unfavorable? Does an unfavorable materials price variance necessarily indicate a control problem? Explain why or why not. 7. When will the materials quantity variance be unfavorable? Might an unfavorable materials quantity variance be related to ather variances, such 2s the materials price variance and the labor quantity variance? Explain why or why not. 8. Many firms (particularly firms using a Just-in-Time inventory philasophy} enter into longterm ‘contracts with a few suppliers. Do you believe this has implications for the materials price variance? Just in-Time firms also encourage workers to stop praduction rather than praduce a defective unit. Could this policy have implications far the labor quantity variance? Why might a favorable sales volume variance lead ta an unfavorable fixed cast spending variance? How does your answer reconcile with the fixed cost/ variable cost classification of casts? 10. Statistical control charts establish upper and lewer control limits. Observations falling outside these limits oF a sequence of observations above or below the expected value, even if within the control limits, trigger an investigation. How does this practice canform to our description of haw firms use profit variance analysis?Budgetary Control and Variance Analysis 111. If nonfinancial measures are bath more timely and more specific than financial measures, why do firms use financial measures at all? (Hint: Consider whether a manager should implement a decision that increases ane nonfinaneial measure but decreases another nonfinancial measure. For example, decreasing the mean time per call handled increases the efficiency of customer support staff but Potentially decreases service quality and customer satisfaction.)Balakrishnan/Managerial Accounting, 2e Solutions to Short Essay 1, (LO-1) Think ofa budget you may have in any given month for eating ut, for entertainment — playing video games in the local arcade or going to the movies, and for elothing. At the end of the month, you may realize that you have spent alot more on video games that you had budgeted because you had gatten addicted to a new game! 2. {LO-1) —_Botharguments are valid. Tight but achievable budgets are a way to motivate peaple in organization to become mare careful and efficient. However, tight budgets could be very demotivating if they are unachievable, and could lead to a loss in emplayee morale. Tight budgets are especially effective when the tasks involved are specific, well-defined, and routine. Loose budgets are more suitable when tasks are not well-specified and outcomes are uncertain. A good example is research and development efforts in, say, pharmaceutical company. These companies have to invest in RED to stay ahead of competition, but itis difficult to specify a tight budget when it comes ta the discovery af new drugs. Planning and cantral for such activities have ta be more informal and inter-active. 3. (10-2) Think:about the mid-terms you take. You plan to spend a certain amount of time on each subject based on your assessment of the difficulty of each subject. When you get your grades back, you may not have doneas well as you might have expected in some subjects, and you may have done exceedingly well in others. This helps yau in allocating your time to study for the finals. Variances influence the behavior of any intelligent living being. For example, they are extremely useful in modifying the behaviar of pet dogs and cats. They can detect changes in patterns and modify their behavior accordingly. 4. (LO-2) Sales volume variance will be unfavorable when the actual sales volume is less than planned sales volume underfying the master budget. Sales price variance will be unfavorable when the actual sales price is less than the expected sales price at the time of preparing the master budget. Yes, it is possible. Think of the reduced demand for trucks and SUVs in response to steeply rising fuel price in the first six months of 2008. The auto companies are reducing the prices on these vehicles drastically to increase sales. Yet, despite such price cuts, the sales of these vehicles plummeted during this period. 5. (LO-2) Not necessarily. The sales volume variance has nothing to do with input quantities. It will be favorable when the actual sales volume (i., output sold) is greater than the planned sales volume underlying the master budget. 6. (LO-2, LO-3) The materials price variance will be unfavorable if the actual price of materials is higher than the budgeted price. tt may not always indicate a control problem. Unexpected shortages in the market can cause the price of materials to increase. The purchase manager cannot be held responsible for such eventualities. 7. (LO-2, LO-3) The material quantity variance will be unfavorable if the actual quantity consumed is more than the budgeted quantity for the actual output produced. A favorable materials price may Well be related to an unfavorable quantity variance if substandard materials are bought (hence a favorable price variance) and used in the production process (use of mare materials than requiredBudgetary Control and Variance Analysis, because of low quality). For simitar reasons, an unfavorable labor quantity variance (use of more labor than budgeted) may be related to favorable quantity variance if inexperienced labor is used. 8. (10-3) Some of the traditional variances lose their meanings in “lean” production enviranments such as JIT, FMS environments. Entering into long. term contracts with suppliers ensures stable supply of critical inputs. However, firms often pay a premium for such arrangements. Budgets have to reflect this philosophy so that traditional variances can serve a meaningful control role {if at all). By the same token, new variances may have to be designed that can be useful in such environments. ‘Turning to the labor quantity variance, the focus in a JIT environment is to achieve high quality levels with minimal defective production. Instead of focusing on the traditional labor quantity variance in such settings, simple variances such as the deviation of the output rate from an expected rate can be effective for contral purposes. 9. (LO-3) swe know, Sales volume variance will be favorable when the actual sales volume is ‘more than planned sales walume underlying the master budget. Unexpected demand spurts can lead such 2 favorable variance. But when such 3 spurt occurs, capacity resources get stretched, in which ‘ase the actual fixed costs are likely to increase (e.g, rental of additional equipment, avertime paid for supervision etc.) 10; (10-4) We can think of the expected value as being similar to budgets. Any deviation within the control limits is “acceptable” if it does not persist over time, or if tis just a chance deviation. Persisting deviations even within control limits is often an indication of a shift in the process that may worsen if not corrected. in principle, profit variance analysis is very similar. if production costs {20 up, unfavorable variances will be generated. Persisting variances may be indicative of a shift in cost structure or process efficiencies. 11. (LO-4) While non-financial measures are specific and timely, they are often numerous and they interact with ane another. Inreasing customer satisfaction often requires spending more time with the: customer. Bath customer satisfaction measures and mean time per call are non-financial measures that are (typically) related to each other. Deciding how much time to spend on each customer requires trading off the long-term financial benefit from keeping customers satisfied against the cost of time and resources needed.Balakrishnan/Managerial Accounting, 2 Exercises, 1. Garnet's Gym isafitness and aerobic center located in Atlanta, Georgia. The fallowing table reports Gamet’s master budget and actual results for the most recent year: Membership fee (per member) Number of members Variable cost (per member) $200 $200 Fixed costs $1,200,000 $1,200,000 With regard to the discrepancies between the budgeted and actual membership fee and the budgeted and actual number of members, the owners of Garnet's Gym inform you that in early January they decided to raise the membership fee from $500 to $550. The owners believed that such an action would only reduce membership by 500 rather than 1,000, as actually occurred, Required: 2, What was Gamet’s total profit variance for the most recent year? b. Calculate Garnet's sales volume variance and sales price variance for the most recent year. Did raising the membership fee turn out to be a good idea? €. Would raising the membership fee have been a good idea if membership decreased by S00 (as predicted) rather than 1,000? 2. The Glass Wessel Company has established the following budget for producing one of its hand-blown vases: Materials (silica) 2 pounds @ 1.25 per pound Labor 1.5 hours @ $15.00 per hour In March of the most recent year, Glass Vessel produced 300 vases using 650 pounds of materials. Glass Vessel purchased the 650 pounds of materials for $845. Labor costs for March were $7,200 for 480 hours worked. ‘a. What were Glass Vessel’s materials price and materials quantity variances for March? b. What were Glass Vesset’s labor price and labor quantity variances for March?[Budgetary Control and Variance Analysis 3. Assume that you area franchisee of a fast-food chain, “Pita Palace,” that serves made to- order pitas. The menu, prices, and decor are dictated by the national office; further, you are required to purchase all of your supplies through a specified distributor. Your primary responsibilty is to ensure adequate staffing and to exercise quality control. Naturally, as the franchisee, you also are keenly interested in your store’s profitability. Required: |@. Asthe franchisee, list two financial measures and two nonfinancial measures that you ‘would monitor on a shart term (e.g., weekly) basis. 1b. Why do think itis important to use both financial and nonfinancial measures? 4. Tam.and Lynda awn Hercules Health Club, For the manth af April, they had forecasted gym ‘membership at 700 individual members and 300 family memberships. Individual members pay $100 per month and families pay $150 per month. Variable costs are $35 and $60 per month, respectively. Actual results for April show membership at 750 individual and 250 family members. Requited: a. Determine Hercules' sales volume variance. b. Decompose the sales volume variance into a sales mix variance and a sales quantity variance, ‘€. Why did Hercules’ contribution decrease even though the total memberships were the same?Balakrishnan/Managerial Accounting, 2e Solutions to Exercises 1. (LO1, LOZ, Lo3) 2. The total profit variance = actual profit — master budget profit. With the information provided, ‘we have: Master ‘Actual Budget Results, fof members 5,000 4,000 Revenue ‘$2,500,000 $2,200,000 Variable costs 1,000,000 800,000 ‘Contribution margin $1,500,000 $1,400,000 Fixed costs 1,200,000 ‘1,200,000 Profit ‘$300,000 ‘$200,000 ‘Gamer's total profit vartance = $200,000 ~ $300,000 = ($100,000) or $100,600 U. That is, ‘Garnet's profit was $100,000 lower than expected. b. Toarrive at the sales volume variance and the sales price variance, we need to calculate Garnet's flexible budget. With the data provided, we have: tof members Revenue” Variable costs? Contribution margin Fixed costs Profit * $2,000,000 = 4,000 x $500. * $2,800,000 = 4,000 = $200. ‘The following table shows Garnet’s master budget, flexible budget, and actual results far the: most recent year. ‘The sales volume variance equals the difference between flexible budget profit and master ‘budget profit. Fer Garnet's Gym, we have $0 $300,000 = ($300,000) or $300,000 U sales volume variance.Budgetary Control and Variance Analysis, The sales price variance equals the difference between actual revenue and flexible budget revenue. For Garnet’s Gym, we have $2,200,000 — $2,000,000 = $200,000 F sales price variance, NOTE: Garnet's total profit variance of $100,000 U = $300,000 U sales volume variance + $200,000 F sates price variance. This occurs because actual fixed and variable costs equaled budgeted fixed and variable costs (Le., both the fixed cost spending variance and the flexible budget variable: cast variance = $0). Based on the sales variances, it appears that raising the membership fee was not a good idea as itreduced Garnet's profit by $100,000. In essence, the increased revenue generated fram raising the membership fee (ie., the favorable sales price variance) did not compensate for the ‘eduction in members from raising the membership fee (Le., the unfavorable sales wolume variance), This question links back to the material covered in Chapters 4 and S. At the time the decision was made, raising the membership fee to $550 was expected ta increase profit by $75,000. This can be seen by comparing expected profit with and without the increase in the membership fee: Budgeted Profit Expected Profit {without fee increase) {with fee increase) fof members: 5,000 4,500 Revenue! ‘$2,500,000 $2,475,000 Variable costs? 1,000,000 ‘900,000 Contribution margin $1,500,000 $1,575,000 Fixed costs 1,200,000 11,200,000 Profit ‘$300,000 $375,000 +: $2,500,000 = 5,000 $500; $2,475,000 = 4,500 x $450. $1,000,000 = 5,000 = $200; $900,000 = 4,500 $200. Alternatively, we could calculate the benefit of increasing the membership fee as 4,500 $50 = $225,000 and the cost (last contribution margin due to 500 fewer members) as 500 x ($500— $200) = $150,000, again netting to a $75,000 increase in profit. Either way, the decision appeared to be a good one based on the data available at the time: the decision was made. Unfortunately, the actual decrease in membership was double that expected (1,000 ws. 500), leading to a $100,000 reduction in profit, as documented earlier. This problem underscores the importance of conducting variance analysis — what appeared to bea good decision turned ut to be a paar decision (in terms of the bata line, anyway). Had we not undertaken a retrospective examination of the owner's decision to increase the ‘membership fee (ic., by calculating the sales price and sales volume variances) the negative effect on profit might have gone unnaticed. With variance analysis, the owners are in a position to correct the decision they previously made ~ based on our calculations, the owners should seriously consider going back to a $500 annual membership fee in the coming year.Balakrishnan/Managerial Accounting, 2c 2. 102 a, To calculate the materials price and quantity variances, we need to know: (2) the flexible budget for materials; (2) the “as i budget for materials with actual efficiencies; and (3) the actual results. The table below provides the required computations and accompanying variances. Flexible Quantity —“Asi® Price ‘Actual Budget’ Vorionce budget’ Variance __ Results” Materials $750 | $62.50U | $ai250 | $3250U | $845 * $750 = 300 vases actually produced x 2 pounds of materials budgeted per vase x $1.25 budgeted cost per pound. $812.50 = 650 pounds of materials actualy used x $1.25 budgeted cost per pound. ‘Given. ‘Thus, Glass Vesse’s materials price and quantity variances were $32.50 U and $62.50U, respectively, for March, b. Asin part fa. ta calculate the labor price and quantity variances, we need to know: (1) the flexible budget for labor; (2) the “as if” budget; and (3) the actual results. The table belaw provides the required computations and accompanying variances. Flexible Quantity “ASIP Price ‘Actual Budget’ Variance ___ budget” _—Variance __ Results? Labor $6,750 ‘$450 ‘$7,200 0 $7,200 $6,750 = 300 vases actually produced x 1.5 hours of labor budgeted per vase $15.00 budgeted cost per labor hour. 67,200 = 480 hours actually worked x $15 budgeted cast per labor hour. "Given. © Thus, Glass Vesset’s labor price and quantity variances were $0 and $450 U, respectively, for March.Budgetary Control and Variance Analysis Loa a ‘Asthe franchisee, you need to monitor both financial measures (for assessing business profit) and non-financial metrics (for ensuring adherence to policies and to identify future problems and opportunities). Financia! Measures: Ona short-term (daily and/or weeky) basis, you probably will monitor total sales (as per the: register) and receipts (as per the cash drawer). This informs yau of what is caming into the business and whether it differs from the prior week or budget. Further, a reconciliation between ‘otal sales (per the register) and receipts informs you of whether you have problems with regard ‘taemployee theft (.e., employees taking money and/or not charging their friends for meals). You also probably would track total purchases and total labor costs. In this business, purchases of food items and supplies and labor represent the bulk of your variable costs. Similar to sales, these items ean be compared to the budget, with any significant deviations being followed up. Finally, by tracking sales, purchases, and labor casts, you monitor your weekly cantribuition ‘margin; again, this enables you to assess any increases or decreases relative to the budget. ‘Non-Financial Performance Measures: Here, you probably would track things like customer complaints and employee absenteeism/turnover (complaints and absent employees are early warning signs that something is wrong). You also might track materials usage, which is important both to.ensure that customers are net getting short-changed in the amount of foad served and to prevent pilferage. Finally, you would track the cleanliness af the restaurant and focifities and assure: {Beneral adherence to daily procedures (e.g., employees wear gloves, all doors are locked at days end, counters are wiped down). b. ‘Non-financial measures are more immediate (timely) and actionable (specific); they ensure that People are doing what they are supposed ta be doing and that pracesses are performing:as ‘expected. Such measures can help identify and correct prablems before they become severe (eg. for a sports analogy, if players are not showing up for practice, this decreases the chances, of doing well). Financial measures tend to be more aggregate in nature; they are excellent summary measures, showing haw a business has performed for a given period of time. These measures allow us to quickly assess whether the business is on track or in need of help (similar to the win toss record: of a sports team). ‘The two types of measures clearly are related. For example, employee absenteeism would show Lup eventually in the financial statements both in the form of reduced sales and increased staffing cost. Tracking absentesism direetly allows for immediate identification of problem cemplayees with a ready-made solution.‘Balakrishnan/Managerial Accounting, 2e 4. Appendix c ‘a, Using the information provided, we have: individuals 750 Fa 250 Revenue Individual $70,000 $75,000 Revenue ~ Family 45,000 37,500 Variable eosts - Individual 24500 26,250 Variable costs - Family 18,000 15,000 Contribution margin $72,500 $71,250 Sales volume varianee = flexible budget profit master budget profit = $71,250—$72,500= $1,2800. b We gain intuition into the operating results by recasting the above data using a Weighted Unit Contribution Margin (WLICM). We have the WUCM reser = $72,500 / (700 + 300 memberships) = $72.50 / membership. WUCMystse = $71,250 / (750 + 250 memberships) = $71.25 / membership. We could compute the answers using the formulae pravided in Appendix C. Sales Mix Variance = Actual Total Sales x (WUCM tte txt ~WUCM pases tt) Sales Quantity Variance = (Actual Total Sales ~ Budgeted Total Sales) 2 WUCM ysis tage Plugging in the numbers we have: Sales Mix Variance = 1,000 ($72.5 - $71.25) = ($1,250) or $1,250 U. Sales Quantity Variance = (1,000 — 1,000) x $72.50 = $0. The change in the sales minis the sole reason for the change. The sales mix has shifted toward the less profitable (on a per unit basis) individual memberships and away fram the more profitable family memberships. Consequently, the average member now only yields $71.25 in ‘contribution margin rather than the budgeted amaunt of $72.50. This change in mix aver 1,000 total memberships leads toa net drop of $1,250 in profit ($1,250 = 1,000 x $1.25).Actual Planned Price Price Variances are Linear @ Actual Cost (©)Budgeted Cost O Costin Flexible | Usage Variance Budget (unfavorable) il Quantity Flexible Budget . Quantity Actual Input Quantity LO2: Perform variance analysis.Profit Reconciliation Master Budget Profit $9,275 Sales volume variance $1,995 F $1,995 Flexible budget variances Sales price variance ($3,800) U (3,800) Materials variances Price variances (total) ($509) U Efficiency variances (total) 192 F Total ($317) U (317) Labor variances Price variance $0 Efficiency variance (1,000) U Total ($1,000) U (1,000) Variable overhead Price variance ($117) U Efficiency variance (55) U Total ($172) U (172) Fixed cost spending ($500) U (500) Actual Profit $5,481 LO2: Perform variance analysis.Test Your Knowledge! For what purpose is a flexible budget used? a) b) c) qd) To provide various possible outcomes for management to consider To adjust input prices so that future variances are eliminated To insure that profit does not drop below a predetermined level To identify the sources of variancesTest Your Knowledge! For what purpose is a flexible budget used? a) To provide various possible outcomes for management to consider b) To adjust input prices so that future variances are eliminated c) To insure that profit does not drop below a predetermined level (@)T6 identify the sources of variances A flexible budget helps identify what caused any differences between the budgeted amount allowed at the actual level of sales and the actual amounts incurred.eae i | Check It! Exercise #4 a en @©$___pereake 1) Budgeted sales price $__percake (2) Actual sales quantity ______ cakes a Sales price variance ($3,801 800) (4) = (0) - @1* @)vom Check It! Exercise #4 Ooo 2 Verify that the above formula yields a sales price variance of $3,800 U for Cindy's Cakes. Actual sales price @$ $19.95 per cake (1) Budgeted sales price $ $20.95 per cake (2) Actual sales quantity 3,800 cakes (3) Sales price variance ($3,800) (4) = [(1) — (2)] x (3) (4) $75,810 actual revenue / 3,800 cakes actually sold (2) ($19.95 - $20.95) x 3,800 = $3,800 UInterpreting Variances * Investigate all significant variances » Large variance shows poor plan / execution * Examine trends ~ Consistent sign may be related to plan assumptions * Consider the total picture ~ Variances ignore interactions ~ Price-quantity, input substitution LO3: Interpret variances to determine possible corrective actions.Check It! Exercise #5 Verify that the price and efficiency variances for eggs are $372 U and $48 F, respectively. Actual price per egg Budgeted price per egg Actual input quantity Flexible budget quantity @ ; Input price variance (eggs) ($372)@) 7 Input quantity variance (eggs) aOU Check It! E ise #5 OOIV)_)} or xercise Verify that the price and efficiency variances for eggs are $372 U and $48 F, respectively, Actual price per egg _$0.14 Budgeted price per egg _ $0.12 Actual input quantity _18,600_ Flexible budget quantity 19,000 Input price variance (eggs) ($372)Q) Input quantity variance (eggs) $48G) @s5 eggs per cake x 3,800 cakes (2) $372 U = [($0.12 - $0.14) x 18,600] (3) $48 F = [(19,000 - 18,600) x $0.12]Non-financial Controls * Non financial measures better on > Timeliness ~ Specificity * Non-financial measures used for ~ Process control " Provide localized feedback for immediate action » Agency control (Chapter 12 & 13) LO4: Explain how nonfinancial measures complement variance analysis.Test Your Knowledge! The controller for Navia, Inc. created a budget prior to the current period. At the end of the period, the controller compared the budget with the actual results. For what purpose is the controller using budgets? a) Coordination b) Control c) Variances d) PlanningTest Your Knowledge! The controller for Navia, Inc. created a budget prior to the current period. At the end of the period, the controller compared the budget with the actual results. For what purpose is the controller using budgets? a) Coordination Gy conta c) Variances d) Planning Having a good plan alone is not sufficient. The budget must be compared to actual performance, with any significant differences investigated and changes made as necessary.(Appendix A) PURCHASE PRICE VARIANCE Appendix ARationale * We calculated materials price variance based on quantity of materials used » This can differ from quantity purchased » Firms want to know a variance sooner than later ~ Thus, many calculate the materials price variance on the quantity of materials purchased. ° Which approach is better? > “Quantity purchased” is the pure approach and is consistent with a traditional accounting view » Wecontinue to employ “quantity used” * Helps with profit reconciliation Appendix A(Appendix B and C) MARKETING VARIANCES Appendix B and CAppendix B: Market Size and Share * This is a drill down of sales volume variance » Similar in principle to breaking down labor variance into labor rate and labor quantity variances. » Volume (in units or $) = Market Size x Market Share = Sales Volume Variance turns both dials = The decomposition turns one dial at a time Appendix B and CDecomposition: Graphical Static budget profit Flexible budget profit Planned market size Actual market size Actual market size x Planned market share x Planned market share x Actual market share x Planned UCM x Planned UCM x Planned UCM Market size variance Market share variance LC Sales volume variance Qo Appendix B and CExample Static budget profit (3,500 cakes) 17,500 cakes x 20% share x $6,65/cake = $28,525 20,000 cakes x 20% share x $6.65/cake = $32,600 Flexible budget profit (3,800 cakes) 20,000 x 19% share x $6.65/cake = $30,970 ft Market size variance Market share variance | $3,325 F $1,330 U | Sales volume variance $1,995 F Appendix B and CAppendix C: Multiple Products ° Thus, far we have considered a 1- product case >» Budget was budgeted quantity and UCM. Flexible budget based on actual quantity and budgeted UCM. Thus. = Sales volume variance = (Actual quantity — budgeted quantity) * budgeted UCM ° With Multi-product case > Budget at budgeted quantity and budgeted UCM for each product » Flexible budget at actual quantity and budgeted UCM for each product ° We can perform analysis in two ways » Analyze each product separately = Appropriate when products are independent > Consider each product as a (total quantity * % share of product) = Useful when products are substitutes / complements Appendix B and CMulti-product Variance Analysis * Focus on second type of analysis 7 Recall that in CVP, when we considered multiple products, we used sales mix (% sales of each kind) to calculate Weighted Average Contribution Margin (WACWM). » Identical concept used here « Use budgeted total sales (in units) and budgeted WACM to compute master budget = Use actual total sales (in units) and actual WACM in flexible budget * But, this turns two dials — total sales and WACM » Can decompose into a mix effect and a quantity (mix- adjusted total sales) effect » Introduce a “as if’ column between master and flexible budget Appendix B andCMix and Quantity Variances Static budget profit Profit in flexible budge Planned total sales Actual total sales Actual total sales x Planned mix x Planned mix x Actual mix x Planned UCM x Planned UCM x Planned UCM a Sales quantity variance Sales mix variance Sales volume variance @ Appendix B and ¢Pacific Telephones Product PT1000 PT2000 Total Product PT1000 PT2000 Sales Price per $29.95 $59.95 Sales Price per Unit $29.00 $60.50 Unit Variable $8.50 $24.00 Unit Variable Cost $8.45 $24.25 Sales (in Units) 150,000 50,000 200,000 Sales (in Units) 154,000 47,000 201,000 Appendix B and CSales Volume Variance Static budget profit 200,000 plan units x $25.075 plan WACM 201,000 Actual units x $25.075 Plan WACM Profit in flexible budge’ 201,000 Actual units x $24,841 WACM in flexible budget Sales quantity variance Sales mix variance Ltt $25,075 F $47,125 U Sales volume variance $22,050 U Appendix B andCExercise 8.36 Calculating materials and labor price and quantity variances (LO2). The Glass Vessel Company has established the following budget for producing one of its hand-blown vases: In March of the most recent year, Glass Vessel produced 300 vases using 650 pounds of materials. Glass Vessel purchased the 650 pounds of materials for $845. Labor costs for March were $7,200 for 480 hours worked. Required: a) What were Glass Vessel’s materials price and materials quantity variances for March? b) What were Glass Vessel’s labor price and labor quantity variances for March?Exercise 8.36 (Continued) a) What were Glass Vessel’s materials price and materials quantity variances for March? To calculate the materials price and quantity variances, we need to know: (1) the flexible budget for materials; (2) the “as if” budget for materials with actual efficiencies; and (3) the actual results. The table below provides the required computations and accompanying variances. Flexible Quantity “As if” Price Actual Budget’ Variance budget’ Variance Results’ Materials $750 $62.50U $812.50 $32.50U $845Exercise 8.36 (Continued) a) What were Glass Vessel’s materials price and materials quantity variances for March? Flexible Quantity “As if? Pie Actual Budget’ Variance budget’ Variance Results® Materials $750 $62.50U $812.50 $32.50U $845 1 $750 = 300 vases actually produced x 2 pounds of materials budgeted per vase x $1.25 budgeted cost per pound. 2 $812.50 = 650 pounds of materials actually used x $1.25 budgeted cost per pound. 3 Given.Exercise 8.36 (Continued) b) What were Glass Vessel’s labor price and labor quantity variances for March? As in part [a], to calculate the labor price and quantity variances, we need to know: (1) the flexible budget for labor; (2) the “as if” budget; and (3) the actual results. The table below provides the required computations and accompanying variances. Flexible Quantity “As if” Price Actual Variance budget” Variance Results° Labor $6,750 $450U $7,200 $0Exercise 8.36 (Continued) b) What were Glass Vessel’s labor price and labor quantity variances for March? Flexile Quantity “As ue Price Actual i Budget Variance budget Variance Results $6,750 $450U $7,200 $0 1 $6,750 = 300 vases actually produced = 1.5 hours of labor budgeted per vase x $15.00 budgeted cost per labor hour. 2 $7,200 = 480 hours actually worked x $15 budgeted cost per labor hour. 3 Given.