CHAPTER 7-ASSIGNMENT

CHAPTER 7FLEXIBLE BUDGETS, VARIANCES, ANDMANAGEMENT CONTROL: I7-23Flexible budget preparation and analysis.1. Solution: Variance Analysis for Bank Management Printers for September 2004Level 1 AnalysisActual Results (1) Static-Budget Variances(2) = (1) – (3)StaticBudget(3)Units sold Revenue12,000$252,000a3,000 U$ 48,000 U15,000$300,000cVariable costs 84,000d36,000 F 120,000fContribution margin Fixed costs Operating income168,000150,000$ 18,00012,000 U5,000 U$ 17,000 U180,000145,000$ 35,000Total static-budget variance2. Level 2 AnalysisActual Results (1)Flexible-BudgetVariances(2) = (1) – (3)FlexibleBudget(3)SalesVolumeVariances(4) = (3) – (5)StaticBudget(5)Units sold 12,000 0 12,000 3,000 U 15,000Revenue $252,000a$12,000 F $240,000b$60,000 U $300,000cVariable costs 84,000d12,000 F 96,000e24,000 F 120,000fContribution margin 168,000 24,000 F 144,000 36,000 U 180,000 Fixed costs 150,000 5,000 U 145,000 0 145,000 Operating income $ 18,000 $19,000 F $ (1,000) $36,000 U $ 35,000a 12,000 × $21 = $252,000 d 12,000 × $7 = $ 84,000b 12,000 × $20 = $240,000 e 12,000 × $8 = $ 96,000c 15,000 × $20 = $300,000 f 15,000 × $8 = $120,0003. Level 2 analysis provides a breakdown of the static-budget variance into a flexible-budget variance and a sales-volume variance. The primary reason for the static-budget variance being unfavorable ($17,000 U) is the reduction in unit volume from the budgeted 15,000 to an actual 12,000. One explanation for this reduction is the increase in selling price from a budgeted $20 to an actual $21. Operating management was able to reduce variable costs by $12,000 relative to the flexible budget. This reduction could be a sign of efficient management. Alternatively, it could be due to using lower quality materials (which in turn adversely affected unit volume).7-24 Flexible budget, working backward.1. Solution:Actual Results (1)Flexible- Budget Variances (2)=(1)-(3)Flexible Budget (3)Sales-Volume Variances (4)=(3)-(5) Static Budget (5) Units Sold650,000 0 650,00050,000 F 600,000 Revenues $3,575,000 $1,300,000 F$2,275,000a $175,000 F$2,100,000 Variable costs2,575,000 1,275,000 U1,300,000b100,000 U 1,200,000Contribution margin1,000,00025,000 F975,00075,000 F900,000Fixed costs700,000 100,000 U 600,000 0600,000 Operating income $ 300,000 $ 75,000 U$ 375,000 $ 75,000 F$ 300,000a650,000 × $3.50 = $2,275,000 b650,000 × $2.00 = 1,300,0002. Actual selling price: $3,575,000 ÷ 650,000 = $5.50 Budgeted selling price: 2,100,000 ÷ 600,000 =3.50 Actual variable cost per unit: 2,575,000 ÷ 650,000 = 3.96 Budgeted variable cost per unit: 1,200,000 ÷ 600,000 = 2.003. The CEO’s reaction was inappropriate. A zero total static -budget variance may be due to offsetting total flexible-budget and total sales-volume variances. In this case, these two variances exactly offset each other:Total flexible-budget variance $75,000 Unfavorable Total sales-volume variance $75,000 Favorable A closer look at the variance components reveals some major deviations from plan. Actual variable costs increased from $2.00 to $3.96, causing an unfavorable flexible-budget variable cost variance of $1,275,000. Such an increase could be a result of, for example, a jump in platinum prices. Specialty Balls was able to pass most of the increase in costs onto their customers - average selling price went up about 57%, bringing about anoffsettingTotal flexible-budget variance Total sales volume varianceTotal static-budget variancefavorable flexible-budget revenue variance in the amount of $1,300,000. An increase in the actual number of units sold also contributed to more favorable results. Although such an increase in quantity in the face of a price increase may appear counter-intuitive, customers may have forecast higher future platinum prices and therefore decided to stock up.4.The most important lesson learned here is that a superficial examination of summary level data (Levels 0 and 1) may be insufficient. It is imperative to scrutinize data at a more detailed level (Level 2). Had Specialty Balls not been able to pass costs on to customers, losses would have been considerable.7-27Price and efficiency variances, journal entries.1. Solution: Direct materials and direct manufacturing labor are analyzed in turn:Actual CostsIncurred(Actual Input Qty. × Actual Price) Actual Input Qty.× Budgeted PriceFlexible Budget(Budgeted InputQty. Allowed forActual Output× Budgeted Price)Direct Materials (100,000 × $3.10a)$310,000Purchases Usage(100,000 × $3.00) (98,073 × $3.00)$300,000 $294,219(9,810 × 10 × $3.00)$294,300DirectManufacturing Labor (4,900 × $21b)$102,900(4,900 × $20)$98,000(9,810 × 0.5 × $20) or(4,905 × $20)$98,100a.$310,000 ÷ 100,000 = $3.10b.$102,900 ÷ 4,900 = $212. Direct Materials Control 300,000Direct Materials Price Variance 10,000Accounts Payable or Cash Control 310,000 Work-in-Process Control 294,300Materials Control 294,219Direct Materials Efficiency Variance 81 Work-in-Process Control 98,100Direct Manuf. Labor Price Variance 4,900Wages Payable Control 102,900Direct Manuf. Labor Efficiency Variance 1003. Some students’ comments will be immersed in conjecture about higher prices for materials, better quality materials, higher grade labor, better efficiency in use of materials, and so forth. A possibility is that approximately the same labor force, paid somewhat more, is taking slightly less time with better materials and causing less waste and spoilage.A key point in this problem is that all of these efficiency variances are likely to be insignificant. They are so small as to be nearly meaningless. Fluctuations about standardsare bound to occur in a random fashion. Practically, from a control viewpoint, a standard isa band or range of acceptable performance rather than a single-figure measure.4.The purchasing point is where responsibility for price variances is found most often. The production point is where responsibility for efficiency variances is found most often. Chemical Inc. may calculate variances at different points in time to tie in with these different responsibility areas.。