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Tuna Company set the following standard unit costs for its single product. Direct materials (28 Ibs. @ $3 per Ib.) Direct labor (6 hrs. @ $6 per hr.) Factory overhead variable (6 hrs. @ $4 per hr.) Factory overhead fixed (6 hrs. @ $5 per hr.) $ 84.00 36.00 24.00 30.00 Total standard cost $ 174.00 The predetermined overhead rate is based on a planned operating volume of 80% of the productive capacity of 50,000 units per quarter. The following flexible budget information is available. Operating Levels 70% Productio n in units Standard direct labor hours Budgeted overhead Fixed factory overhead Variabl e factory overhead 90% 35,000 40,000 45,000 210,000 $ 80% 240,000 270,000 1,200,000 $ 840,000 $ 1,200,000 $ 960,000 $ $ 1,200,000 1,080,000 During the current quarter, the company operated at 90% of capacity and produced 45,000 units of product; actual direct labor totaled 263,000 hours. Units produced were assigned the following standard costs: Direct materials (1,260,000 Ibs. @ $3 per Ib.) Direct labor (270,000 hrs. @ $6 per hr.) Factory overhead (270,000 hrs. @ $9 per hr.) $ 3,780,000 1,620,000 2,430,000 Total standard cost $ 7,830,000 Actual costs incurred during the current quarter follow: Direct materials (1,255,000 Ibs. @ $3.10) Direct labor (263,000 hrs. @ $5.75) Fixed factory overhead costs Variable factory overhead costs Total actual costs $ 3,890,500 1,512,250 2,332,264 2,183,396 $ 9,918,410 1. value: 10 points Required: 1. Compute the direct materials cost variance, including its price and quantity variances. (Do not round your intermediate calculations. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.) Direct materials cost variance Price variance Quantity variance $ $ $ check my workeBook Links (2)references 2. value: 10 points 2. Compute the direct labor variance, including its rate and efficiency variances. (Do not round your intermediate calculations. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.) Direct labor cost variance Rate variance Efficiency variance $ $ $ check my workeBook Links (2)references 3. value: 10 points 3. Compute the overhead controllable and volume variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.) Controllable variance Fixed overhead volume variance $ $ Pebco Company's 2011 master budget included the following fixed budget report. It is based on an expected production and sales volume of 15,000 units. PEBCO COMPANY Fixed Budget Report For Year Ended December 31, 2011 Sales Cost of goods sold Direct materials Direct labor Machin ery repairs (variable cost) Deprec iation plant equipment Utilitie s ($45,000 is variable) Plant manageme nt salaries Gross profit Selling expenses Packag ing Shippin g Sales salary (fixed annual amount) General and administra tive expenses $ 3,150,000 $ 945,000 225,000 45,000 315,000 195,000 220,000 1,945,000 1,205,000 90,000 90,000 235,000 415,000 Adverti sing expense Salarie s Enterta inment expense 150,000 230,000 90,000 470,000 Income from operations $ 320,000 4. value: 10 points 1. Classify all items listed in the fixed budget as variable or fixed. Also determine their amounts per unit or their amounts for the year, as appropriate. (Round your variable amount answers to 2 decimal places. Omit the "$" sign in your response.) Variable or Fixed Classification Variable sales Amount $ Variable costs $ Total variable costs $ Fixed costs $ Total fixed costs $ check my workeBook Linkreferences 5. value: 10 points 2. Prepare flexible budgets for the company at sales volumes of 14,000 and 16,000 units. (Round your variable amount per unit answers to 2 decimal places. Input all amounts as positive values. Omit the "$" sign in your response.) PEBCO COMPANY Flexible Budgets For Year Ended December 31, 2011 Flexible Budget Flexible Total Fixed Cost Variable Amount per Unit Flexible Budget for Unit Sales of 14,000 $ $ Variable costs Total variable costs $ Fixed costs $ Budget f Unit Sal of 16,00 Total fixed costs $ Income from operations $ check my workeBook Linkreferences 6. value: 10 points 3. The company's business conditions are improving. One possible result is a sales volume of approximately 18,000 units. The company president is confident that this volume is within the relevant range of existing capacity. How much would operating income increase over the 2011 budgeted amount of $320,000 if this level is reached without increasing capacity? (Do not round intermediate calculations. Omit the "$" sign in your response.) Operating income increase check my workeBook Linkreferences $ 7. value: 10 points 4. An unfavorable change in business is remotely possible; in this case, production and sales volume for 2011 could fall to 12,000 units. How much income (or loss) from operations would occur if sales volume falls to this level? (Input the amount as positive value. Do not round intermediate calculations. Omit the "$" sign in your response.) $ ACG 2071 Module 10: Using Variances from Standard Costs Standard Are performance goals. Service, merchandising, and manufacturing businesses may all use standards to evaluate and control operations. Manufacturers normally use standard costs for each of the three manufacturing costs o Direct materials o Direct labor o Factory overhead Accounting systems that use standards for these costs are called standard cost systems. o Management determines how much a product should cost - Standard Cost o How much it does cost - Actual Cost o The causes of any differences - Variances o When actual costs are compared with standard costs, only the exceptions or variances are reported for cost control. Called Principle of Exceptions. o Standard costs assists management in controlling costs and in motivating employees to focus on costs. Types of Standards - Theoretical or ideal standards - achieved only under perfect conditions Currently attainable or normal standards - attained with reasonable effort Budgetary Performance Evaluation o When using standard cost system, direct materials, direct labor, and factory overhead are separated into two components Created by M. Mari Fall 2009 Page 1 of 7 ACG 2071 Module 10: Using Variances from Standard Costs o A price standard o A quantity standard Example: Assume that Halycon Balloons produced and sold 5,000 hot air balloons. It incurred direct material costs of $40,150, direct labor costs of $38,500, and factory overhead costs of $22,400. The standard costs for the company are listed below: Manufacturing Costs Standard Price Direct materials Direct labor $5.00 per yard $9.00 per hour Factory overhead Total standard cost per unit $6.00 Standard Quantity per unit 1.5 yards 0.80 hour per unit 0.80 hour per unit Standard Cost per Unit $7.50 $7.20 $4.80 $19.50 Required: Prepare a budget performance report: Manufacturing Costs Direct materials Direct labor Factory overhead Total standard cost per unit Halycon Balloons Budget Performance Report For June, 2009 Actual Costs Standard Costs Cost Variance at Actual (Favorable) Volume Unfavorable $40,150 $37,500 $2,650 $38,500 $36,000 $2,500 $22,400 $24,000 ($1,600) $101, 050 $97,500 $3,550 o Favorable cost variance occurs when the actual cost is less than the standard cost o Unfavorable variance occurs when the actual cost is greater than the standard cost Created by M. Mari Fall 2009 Page 2 of 7 ACG 2071 Module 10: Using Variances from Standard Costs Cost Variance Analysis when a variance occurs, management wants to determine the factors causing it often involves analysis, evaluation, and explanation Direct Materials Variances Price variance = (Actual price - Standard Price) X Actual Quantity Quantity variance = (Actual Quantity - Standard Quantity) X Standard Price Total Direct Materials Variance = Quantity Variance + Price Variance Example: Material used in the production of Z Cleaner has a standard cost of $3 per lb. and standard use of 10,000 lbs. Actual records show 15,000 lbs were used with an actual cost of $2.50 per lb. Compute the direct material variances. Price Variance = (Actual Price - Standard Price) X Actual Quantity = ($2.50 - $3) X 15,000 lbs = -$0.50 X 15,000 lbs = -$7,500 favorable Quantity Variance = (Actual Quantity - Standard Quantity) X Standard Price = (15,000 lbs - 10,000 lbs) X $3.00 = 5,000 lbs x $3.00 = $15,000 Unfavorable Total direct materials variance = Quantity variance + Price variance = $15,000 + (-$7,500) Created by M. Mari Fall 2009 Page 3 of 7 ACG 2071 Module 10: Using Variances from Standard Costs = $7,500 Unfavorable Direct Labor Variances: Rate variance = (Actual Rate - Standard Rate) X Actual Hours Time variance = (Actual Hours - Standard Hours) X Standard Rate Total Direct Labor Variance = Time Variance + Rate Variance Example 4: Factory records show that each product produced requires 3 direct labor hours. Production during the period consisted of 10,000 units with 29,500 hours of labor used. Labor has a standard cost of $10 per hour and actual cost was $11 per hour. Compute the direct labor variances. Rate Variance = (Actual Rate - Standard Rate) X Actual hours = ($11 - $10) X 29,500 hours = $29,500 Unfavorable Time Variance = (Actual hrs - Standard hrs) X Standard rate = [29,500 hrs - ( 3 x 10,000)] x $10 = -500 hours x $10 = -$5,000 Favorable Total Direct labor variance = Rate variance + Time variance = $29,500 + (-$5,000) = $24,500 Unfavorable Created by M. Mari Fall 2009 Page 4 of 7 ACG 2071 Module 10: Using Variances from Standard Costs Factory Overhead Variance: o Determine the impact of changing production on fixed and variable factory overhead cost. o Variances from standard for factory overhead cost result from: Actual variable factory overhead cost greater or less than budgeted variable factory overhead for actual production 1. Controllable variance for variable factory overhead Actual production at a level above or below 100% of normal capacity. 1. Volume variance for fixed factory overhead Example: Halycon Balloons Factory Overhead Cost Budget For the month ending June 30, 2009 Percent of normal capacity 80% 90% 100% Units produced 5,000 5,625 6,250 Direct labor hours ( .8 per unit) 4,000 4,500 5,000 $8,000 $9,000 $10,000 Power and light 4,000 4,500 5,000 Indirect materials 2,400 2,700 3,000 $14,400 $16,200 $18,000 $5,500 $5,500 $5,500 Depreciation 4,500 4,500 4,500 Insurance 2,000 2,000 2,000 $12,000 $12,000 $12,000 Budgeted factory overhead Variable costs: Indirect factory wages Total variable cost Fixed costs: Supervisory salaries Total fixed cost Created by M. Mari Fall 2009 Page 5 of 7 ACG 2071 Module 10: Using Variances from Standard Costs Total factory overhead $26,400 $28,200 $30,000 Halycon produced 5,000 balloons and each unit required 0.80 standard labor hour for production. Actual variable factory overhead was $10,400 and fixed factory overhead was $12,000. Controllable Variance Deals with variable cost Actual variable factory overhead -Budgeted variable factory overhead (at actual production level) Controllable Variance Example: Using the information on Halycon Balloons, compute the controllable variance. Standard direct labor hours for units produced x Standard variable factory overhead per direct labor hour Budgeted variable factory overhead Standard direct labor hours for units produced: 5,000 units produced x 0.80 per hour = 4,000 direct labor hours Variable costs per unit = Total variable factory overhead Total hours = $18,000 = $ 3.60 per hour 5,000 Budgeted variable factory overhead = 4,000 hours x $3.60 = $14,400 Actual variable factory overhead Budgeted variable factory overhead Controllable variance Created by M. Mari Fall 2009 Page 6 of 7 $16,000 $14,400 $1,600 unfavorable ACG 2071 Module 10: Using Variances from Standard Costs Volume Variance Deals with fixed cost 100% capacity direct labor hours -Standard direct labor hours at actual Capacity not used X standard fixed overhead rate Volume variance Example 8: Using the information on Halycon Balloons, assume actual production at 80% capacity. Compute the volume variance. From the factory overhead cost budget, we compute: Fixed costs per unit = Total fixed factory overhead Total hours = $12,000 = $ 2.40 per hour 5,000 based on 100% capacity 100% capacity direct labor hours -Standard direct labor hours at actual Capacity not used X standard fixed overhead rate Volume Variance unfavorable Created by M. Mari Fall 2009 Page 7 of 7 5,000 hours 4,000 hours 1,000 hours x $2.40 $2,400 ACG 2071 Module 10: Using Variances from Standard Costs Standard Are performance goals. Service, merchandising, and manufacturing businesses may all use standards to evaluate and control operations. Manufacturers normally use standard costs for each of the three manufacturing costs o Direct materials o Direct labor o Factory overhead Accounting systems that use standards for these costs are called standard cost systems. o Management determines how much a product should cost - Standard Cost o How much it does cost - Actual Cost o The causes of any differences - Variances o When actual costs are compared with standard costs, only the exceptions or variances are reported for cost control. Called Principle of Exceptions. o Standard costs assists management in controlling costs and in motivating employees to focus on costs. Types of Standards - Theoretical or ideal standards - achieved only under perfect conditions Currently attainable or normal standards - attained with reasonable effort Budgetary Performance Evaluation o When using standard cost system, direct materials, direct labor, and factory overhead are separated into two components Created by M. Mari Fall 2009 Page 1 of 7 ACG 2071 Module 10: Using Variances from Standard Costs o A price standard o A quantity standard Example: Assume that Halycon Balloons produced and sold 5,000 hot air balloons. It incurred direct material costs of $40,150, direct labor costs of $38,500, and factory overhead costs of $22,400. The standard costs for the company are listed below: Manufacturing Costs Standard Price Direct materials Direct labor $5.00 per yard $9.00 per hour Factory overhead Total standard cost per unit $6.00 Standard Quantity per unit 1.5 yards 0.80 hour per unit 0.80 hour per unit Standard Cost per Unit $7.50 $7.20 $4.80 $19.50 Required: Prepare a budget performance report: Manufacturing Costs Direct materials Direct labor Factory overhead Total standard cost per unit Halycon Balloons Budget Performance Report For June, 2009 Actual Costs Standard Costs Cost Variance at Actual (Favorable) Volume Unfavorable $40,150 $37,500 $2,650 $38,500 $36,000 $2,500 $22,400 $24,000 ($1,600) $101, 050 $97,500 $3,550 o Favorable cost variance occurs when the actual cost is less than the standard cost o Unfavorable variance occurs when the actual cost is greater than the standard cost Created by M. Mari Fall 2009 Page 2 of 7 ACG 2071 Module 10: Using Variances from Standard Costs Cost Variance Analysis when a variance occurs, management wants to determine the factors causing it often involves analysis, evaluation, and explanation Direct Materials Variances Price variance = (Actual price - Standard Price) X Actual Quantity Quantity variance = (Actual Quantity - Standard Quantity) X Standard Price Total Direct Materials Variance = Quantity Variance + Price Variance Example: Material used in the production of Z Cleaner has a standard cost of $3 per lb. and standard use of 10,000 lbs. Actual records show 15,000 lbs were used with an actual cost of $2.50 per lb. Compute the direct material variances. Price Variance = (Actual Price - Standard Price) X Actual Quantity = ($2.50 - $3) X 15,000 lbs = -$0.50 X 15,000 lbs = -$7,500 favorable Quantity Variance = (Actual Quantity - Standard Quantity) X Standard Price = (15,000 lbs - 10,000 lbs) X $3.00 = 5,000 lbs x $3.00 = $15,000 Unfavorable Total direct materials variance = Quantity variance + Price variance = $15,000 + (-$7,500) Created by M. Mari Fall 2009 Page 3 of 7 ACG 2071 Module 10: Using Variances from Standard Costs = $7,500 Unfavorable Direct Labor Variances: Rate variance = (Actual Rate - Standard Rate) X Actual Hours Time variance = (Actual Hours - Standard Hours) X Standard Rate Total Direct Labor Variance = Time Variance + Rate Variance Example 4: Factory records show that each product produced requires 3 direct labor hours. Production during the period consisted of 10,000 units with 29,500 hours of labor used. Labor has a standard cost of $10 per hour and actual cost was $11 per hour. Compute the direct labor variances. Rate Variance = (Actual Rate - Standard Rate) X Actual hours = ($11 - $10) X 29,500 hours = $29,500 Unfavorable Time Variance = (Actual hrs - Standard hrs) X Standard rate = [29,500 hrs - ( 3 x 10,000)] x $10 = -500 hours x $10 = -$5,000 Favorable Total Direct labor variance = Rate variance + Time variance = $29,500 + (-$5,000) = $24,500 Unfavorable Created by M. Mari Fall 2009 Page 4 of 7 ACG 2071 Module 10: Using Variances from Standard Costs Factory Overhead Variance: o Determine the impact of changing production on fixed and variable factory overhead cost. o Variances from standard for factory overhead cost result from: Actual variable factory overhead cost greater or less than budgeted variable factory overhead for actual production 1. Controllable variance for variable factory overhead Actual production at a level above or below 100% of normal capacity. 1. Volume variance for fixed factory overhead Example: Halycon Balloons Factory Overhead Cost Budget For the month ending June 30, 2009 Percent of normal capacity 80% 90% 100% Units produced 5,000 5,625 6,250 Direct labor hours ( .8 per unit) 4,000 4,500 5,000 $8,000 $9,000 $10,000 Power and light 4,000 4,500 5,000 Indirect materials 2,400 2,700 3,000 $14,400 $16,200 $18,000 $5,500 $5,500 $5,500 Depreciation 4,500 4,500 4,500 Insurance 2,000 2,000 2,000 $12,000 $12,000 $12,000 Budgeted factory overhead Variable costs: Indirect factory wages Total variable cost Fixed costs: Supervisory salaries Total fixed cost Created by M. Mari Fall 2009 Page 5 of 7 ACG 2071 Module 10: Using Variances from Standard Costs Total factory overhead $26,400 $28,200 $30,000 Halycon produced 5,000 balloons and each unit required 0.80 standard labor hour for production. Actual variable factory overhead was $10,400 and fixed factory overhead was $12,000. Controllable Variance Deals with variable cost Actual variable factory overhead -Budgeted variable factory overhead (at actual production level) Controllable Variance Example: Using the information on Halycon Balloons, compute the controllable variance. Standard direct labor hours for units produced x Standard variable factory overhead per direct labor hour Budgeted variable factory overhead Standard direct labor hours for units produced: 5,000 units produced x 0.80 per hour = 4,000 direct labor hours Variable costs per unit = Total variable factory overhead Total hours = $18,000 = $ 3.60 per hour 5,000 Budgeted variable factory overhead = 4,000 hours x $3.60 = $14,400 Actual variable factory overhead Budgeted variable factory overhead Controllable variance Created by M. Mari Fall 2009 Page 6 of 7 $16,000 $14,400 $1,600 unfavorable ACG 2071 Module 10: Using Variances from Standard Costs Volume Variance Deals with fixed cost 100% capacity direct labor hours -Standard direct labor hours at actual Capacity not used X standard fixed overhead rate Volume variance Example 8: Using the information on Halycon Balloons, assume actual production at 80% capacity. Compute the volume variance. From the factory overhead cost budget, we compute: Fixed costs per unit = Total fixed factory overhead Total hours = $12,000 = $ 2.40 per hour 5,000 based on 100% capacity 100% capacity direct labor hours -Standard direct labor hours at actual Capacity not used X standard fixed overhead rate Volume Variance unfavorable Created by M. Mari Fall 2009 Page 7 of 7 5,000 hours 4,000 hours 1,000 hours x $2.40 $2,400