7-18 Flexible-budget preparation and analysis. Bank Management Printers, Inc., produces luxury checkbooks with three checks and stubs per page. Each checkbook is designed for an individual customer and is ordered through the customer's bank. The company's operating budget for September 2014 included these data: Number of checkbooks Selling price per book Variable cost per book Fixed costs for the month 15,000 $ 20 $ 8 $145,000 The actual results for September 2014 were as follows: Number of checkbooks produced and sold Average selling price per book Variable cost per book Fixed costs for the month 12,000 $ 21 $ 7 $150,000 The executive vice president of the company observed that the operating income for September was much lower than anticipated, despite a higher-than-budgeted selling price and a lower-than-budgeted variable cost per unit. As the company's management accountant, you have been asked to provide explanations for the disappointing September results. Bank Management develops its flexible budget on the basis of budgeted per-output-unit revenue and per-output-unit variable costs without detailed analysis of budgeted inputs. 1. Prepare a static-budget-based variance analysis of the September performance. 2. Prepare a flexible-budget-based variance analysis of the September performance. 3. Why might Bank Management find the flexible-budget-based variance analysis more informative than the static-budget-based variance analysis? Explain your answer. 7-23 Direct materials and direct manufacturing labor variances. Sally May, Inc., designs and manufactures T-shirts. It sells its T-shirts to brand-name clothes retailers in lots of one dozen. Sally May's May 2013 Static budget and actual results for direct inputs are as follows: Static Budget Number of T-shirt lots (1 lot = 1 dozen) 400 Per Lot of T-shirts: Direct materials Direct manufacturing labor 14 meters at $1.70 per meter = $23.80 1.6 hours at $8.10 per hour = $12.96 Actual Results Number of T-shirt lots sold 450 Total Direct Inputs: Direct materials Direct manufacturing labor 6,840 meters at $1.95 per meter $13,338 675 hours at $8.20 per hour =$5,535 Sally May has a policy of analyzing all input variances when they add up to more than 10% of the total cost of materials and labor in the flexible budget, and this is true in May 2013. The production manager discusses the sources of the variances: "A new type of material was purchased in May. This led to faster cutting and sewing, but the workers used more material than usual as they learned to work with it. For now, the stan- dards are fine." 1. Calculate the direct materials and direct manufacturing labor price and efficiency variances in May 2013. What is the total flexible-budget variance for both inputs (direct materials and direct manufactur ing labor) combined? What percentage is this variance of the total cost of direct materials and direct manufacturing labor in the flexible budget? 2. Sally King, the CEO, is concerned about the input variances. But she likes the quality and feel of the new material and agrees to use it for one more year. In May 2014, Sally May again produces 450 lots of T-shirts. Relative to May 2013, 2% less direct material is used, direct material price is down 5%, and 2% less direct manufacturing labor is used. Labor price has remained the same as in May 2013. Calculate the direct materials and direct manufacturing labor price and efficiency variances in May 2014. What is the total flexible-budget variance for both inputs (direct materials and direct manufacturing labor) combined? What percentage is this variance of the total cost of direct materials and direct manufac. turing labor in the flexible budget? 3. Comment on the May 2014 results. Would you continue the experiment of using the new material