del lextem.net EXERCISE 1: Bettis Chemicals uses standard costing to produce an industrial strength cleaning solution called BX4. Bettis created the following Master (Static) budget using an expected production and sales volume of 8,000 units (barrels) of solution. However, actual production and sales were 8,200 barrels. Calculate the Flexible budget and Volume variances. Note whether the variance is Favorable(F) or Unfavorable(u). Per Unit Master(Static) Flexible Budget Volume Standard Budget Variances Budget Units x Actual Units x Budgeted (Std) Budgeted (Std) Per Unit Per Unit Units Sold 8,000 Revenues $64.00 $512,000 Variable Costs Direct Materials 16.00 128,000 Direct Labor 12.50 100,000 Var. Overhead 5.00 40,000 Total Variable Costs 268,000 244,000 Contribution Margin Fixed OH Costs 128,000 Operating Income $116,000 61% Actual Production Volume Materials Used per Unit (barrel) DM Total Quantity Planned for Units Produced 8,200 8 gallons 65,600 gallons Actual 8,200 X 10 gallons 82,000 gallons So, Bettis expected to use a total of 65,600 gallons to produce 8,200 units (barrels). We call this the "Standard Quantity". WARNING: This number is often miscalculated. The definition of "Standard Quantity" is: Standard Quantity = The amount we SHOULD have used for the ACTUAL quantity produced. Use the columnar approach to solve for the price and usage variance and interpret the variances as Favorable (F) or Unfavorable (U). BE SURE TO USE THE DEFINITION ABOVE WHEN CALCULATING STANDARD QUANTITY IN THE RIGHT MOST COLUMN Actual Costs Flexible Budget Direct Materials Actual Qty. Actual Qty. Standard Qty. X Actual Price per gallon X Standard Price per gallon X Standard Price per gallon gallons gallons gallons per per per X $ gallon X $ gallon X $ gallon = OLLES... Textem.net EXERCISE 2: Bettis also compiled the following information regarding its actual costs: per Unit Sales Price per Unit Direct Materials Direct Labor per Unit Variable Overhead per Unit Fixed Overhead Total Budget (Standard) $64.00 16.00 12.50 5.00 128,000 Actual $62.00 14.75 13.25 5.00 134,000 1 Page Determine the Flexible Budget Variances. Be sure to note whether the variance is Favorable or Unfavorable. Flexible Budget Actual Results Actual Units x Budgeted (Std) Per Unit Actual Units x Actual per Unit Flexible Budget Variances Units Sold 8,200 Revenues $524,800 Variable Costs Direct Materials 131,200 Direct Labor 102,500 Actual Production Volume Materials Used per Unit (barrel) DM Total Quantity Planned for Units Produced 8,200 8 gallons 65,600 gallons Actual 8,200 X 10 gallons 82,000 gallons So, Bettis expected to use a total of 65,600 gallons to produce 8,200 units (barrels). We call this the "Standard Quantity". WARNING: This number is often miscalculated. The definition of "Standard Quantity" is: Standard Quantity = The amount we SHOULD have used for the ACTUAL quantity produced. Use the columnar approach to solve for the price and usage variance and interpret the variances as Favorable (F) or Unfavorable (U). BE SURE TO USE THE DEFINITION ABOVE WHEN CALCULATING STANDARD QUANTITY IN THE RIGHT MOST COLUMN Actual Costs Flexible Budget Direct Materials Actual Qty. Actual Qty. Standard Qty. X Actual Price per gallon X Standard Price per gallon X Standard Price per gallon gallons gallons gallons per per per X $ gallon X $ gallon X $ gallon = Actual Production Volume Materials Used per Unit (barrel) DM Total Quantity Planned for Units Produced 8,200 8 gallons 65,600 gallons Actual 8,200 X 10 gallons 82,000 gallons So, Bettis expected to use a total of 65,600 gallons to produce 8,200 units (barrels). We call this the "Standard Quantity". WARNING: This number is often miscalculated. The definition of "Standard Quantity" is: Standard Quantity = The amount we SHOULD have used for the ACTUAL quantity produced. Use the columnar approach to solve for the price and usage variance and interpret the variances as Favorable (F) or Unfavorable (U). BE SURE TO USE THE DEFINITION ABOVE WHEN CALCULATING STANDARD QUANTITY IN THE RIGHT MOST COLUMN Actual Costs Flexible Budget Direct Materials Actual Qty. Actual Qty. Standard Qty. X Actual Price per gallon X Standard Price per gallon X Standard Price per gallon gallons gallons gallons per per per X $ gallon X $ gallon X $ gallon = Var. Overhead 41,000 Total Variable Costs 274,700 Contribution Margin 250,100 Fixed OH Costs 128,000 Operating Income $122,100 What is the Sales Price Variance for the period (above)? $ Price and Usage Variances- DIRECT MATERIALS EXERCISE 3: Flexible budget variances can be further analyzed to determine whether the variance was due to an unexpected fluctuation in price or usage. Use the following data to determine a price and usage variance for Direct Materials: Actual Budget (Std) Price Direct Materials per gallon $1.475 $2.00 Materials Used per unit (barrel) 10 gallons 8 gallons DM Cost per unit (barrel) $14.75 $16.00 How many gallons per unit did Bettis originally plan for in its budget (standard)? 8 gallons (above) Bettis can multiply this number by the actual units to derive how many gallons it should (expects) to use for the actual quantity produced and sold. It can then compare those numbers to actual results: 2 Page gallons gallons gallons X $ per gallon = X $ per gallon = X $ per gallon = $ Price Variance Usage Variance Flexible- Budget Variance 3 | Page Price and Usage Variances- DIRECT LABOR EXERCISE 4: Use the following data to determine a price and usage variance for Direct Labor: Price per Hour Labor Used per unit (barrel) DL Cost per unit (barrel) Actual $10.60 1.25 hours $13.25 Budget (Std) $12.50 1.00 hours $12.50 Note that Bettis "expected to use 1.00 labor hour per unit of product (barrel). Once again, remember the definition of Standard Quantity. Standard Quantity = The amount we SHOULD have used for the ACTUAL quantity produced. Actual Production Volume Labor Used per unit (barrel) DL Total Quantity Planned for Units Produced 8,200 1.00 hours 8,200 hours Actual 8,200 X 1.25 hour 10,250 hours So, Bettis expected to use a total of 8,200 hours of DL to produce 8,200 units (barrels). Calculate the price Variance and Usage Variance. BE SURE TO USE CORRECT STANDARD QUANTITY IN THE RIGHT COLUMN. Also, label the variances as either Favorable (F) or Unfavorable (U). Also, label the variances as either Favorable (F) or Unfavorable (U). Actual Costs Direct Labor Flexible Budget Actual Hours Actual Hours Standard Qty. X Actual Price X Standard Price per hour X Standard Price per hour per hour hours hours hours X $ per hour = X $ hour = per X$ per hour = $ $ Price Variance Usage Variance Flexible Budget Variance 4 Page ACG 2071- Journal Exercise CHAPTER EIGHT Performance Evaluation- Variance Analysis EXERCISE 1: Bettis Chemicals uses standard costing to produce an industrial strength cleaning solution called BX4. Bettis created the following Master (Static) budget using an expected production and sales volume of 8,000 units (barrels) of solution. However, actual production and sales were 8,200 barrels. Calculate the Flexible budget and Volume variances. Note whether the variance is Favorable(F) or Unfavorable(U). Per Unit Master(Static) Flexible Budget Volume Standard Budget Variances Budget Units x Actual Units x Budgeted (Std) Budgeted (Std) Per Unit Per Unit Units Sold 8,000 Revenues $64.00 $512,000 Variable Costs Direct Materials 16.00 128,000 Direct Labor 12.50 100,000 Var. Overhead 5.00 40,000 Total Variable Costs 268,000 Contribution Margin 244,000 Fixed OH Costs 128,000 Operating Income $116,000 What is the Sales-Volume Variance for the period (above)? $. EXERCISE 2: Bettis also compiled the following information regarding its actual costs: Sales Price per Unit Direct Materials per Unit Direct Labor per Unit Variable Overhead per Unit Fixed Overhead Total Budget (Standard) $64.00 16.00 12.50 5.00 128,000 Actual $62.00 14.75 13.25 5.00 134,000 1 Page Determine the Flexible Budget Variances. Be sure to note whether the variance is Favorable or Unfavorable. Flexible Budget Actual Results Actual Units x Actual Units x Flexible Budgeted (Std) Actual per Unit Budget Per Unit Variances Units Sold 8,200 Revenues $524,800 Variable Costs Direct Materials 131,200 Direct Labor 102,500 41,000 Var. Overhead Total Variable Costs 274,700 Contribution Margin 250,100 Fixed OH Costs 128,000 Operating Income $122,100 What is the Sales Price Variance for the period (above)? Price and Usage Variances- DIRECT MATERIALS EXERCISE 3: Flexible budget variances can be further analyzed to determine whether the variance was due to an unexpected fluctuation in price or usage. Use the following data to determine a price and usage variance for Direct Materials: Actual Budget (Std) Price-Direct Materials per gallon $1.475 $2.00 Materials Used per unit (barrel) X 10 gallons X 8 gallons DM Cost per unit (barrel) $14.75 $16.00 How many gallons per unit did Bettis originally plan for in its budget (standard)? 8 gallons (above) Bettis can multiply this number by the actual units to derive how many gallons it should (expects) to use for the actual quantity produced and sold. It can then compare those numbers to actual results: 2 Page Actual Production Volume Materials Used per Unit (barrel) DM Total Quantity Planned for Units Produced 8,200 X 8 gallons 65,600 gallons Actual 8,200 10 gallons 82,000 gallons So, Bettis expected to use a total of 65,600 gallons to produce 8,200 units (barrels). We call this the "Standard Quantity". WARNING: This number is often miscalculated. The definition of "Standard Quantity" is: Standard Quantity = The amount we SHOULD have used for the ACTUAL quantity produced. Use the columnar approach to solve for the price and usage variance and interpret the variances as Favorable (F) or Unfavorable (U). BE SURE TO USE THE DEFINITION ABOVE WHEN CALCULATING STANDARD QUANTITY IN THE RIGHT MOST COLUMN. Direct Materials Actual Costs Actual Qty. Actual Qty. X Actual Price per gallon Flexible Budget Standard Qty. X Standard Price per gallon X Standard Price per gallon gallons gallons gallons per per X $ per gallon = X $ gallon X $ gallon $ Price Variance Usage Variance Flexible- Budget Variance 3 Page Price and Usage Variances- DIRECT LABOR EXERCISE 4: Use the following data to determine a price and usage variance for Direct Labor: Price per Hour Labor Used per unit (barrel) DL Cost per unit (barrel) Actual $10.60 1.25 hours $13.25 Budget (Std) $12.50 1.00 hours $12.50 Note that Bettis "expected to use 1.00 labor hour per unit of product (barrel). Once again, remember the definition of Standard Quantity Standard Quantity = The amount we SHOULD have used for the ACTUAL quantity produced. Actual Production Volume Labor Used per unit (barrel) DL Total Quantity Planned for Units Produced 8,200 X 1.00 hours 8,200 hours Actual 8,200 1.25 hour 10,250 hours So, Bettis expected to use a total of 8,200 hours of DL to produce 8,200 units (barrels). Calculate the price Variance and Usage Variance. BE SURE TO USE CORRECT STANDARD QUANTITY IN THE RIGHT COLUMN. Also, label the variances as either Favorable (F) or Unfavorable (U). Direct Labor Actual Costs Actual Hours Flexible Budget Standard Qty. Actual Hours X Actual Price X Standard Price per hour X Standard Price per hour per hour hours hours hours X $. per hour = X $ per hour = X$ per hour = $ Price Variance Usage Variance Flexible- Budget Variance 4 Page FIXED COST VARIANCES: Carefully review the completed example below to understand Fixed Overhead Cost variances. Completed Example: Fixed overhead costs can be evaluated by calculating: 1) Spending Variance 2) Volume Variance When evaluating Fixed Cost Overhead Variances, there is no Usage Variance to measure because fixed costs are unaffected by the units produced within the relevant range. As a result, the Spending Variance is equal to the Flexible Budget Variance. Recall, these balances from the Exercise 2 analysis. Fixed Costs-Spending Variance Actual Fixed OH Cost Budgeted Fixed OH Cost Spending Variance $134,000 128,000 = $6,000 U The Spending Variance could be due to higher recorded depreciation amounts than expected, or an increase in leasing costs for plant or equipment. A Volume Variance must also be calculated. At the beginning of the year Bettis calculated the following predetermined Overhead Rate. Predetermined Overhead Rate $128,000 Budgeted Overhead Costs = $16.00 per unit 8,000 Budgeted units (barrels) The above rate uses budgeted numbers since the rate is calculated at the beginning of the period (i.e. before actuals are known). Throughout the period, Fixed Overhead costs are allocated or applied based upon the actual number of units produced (8,200 units). To determine the Volume Variance, first calculate how much of the budgeted fixed costs were applied to the actual units of production (i.e. Applied Fixed Costs): - FIXED OVERHEAD- Actual Units X Predetermined Overhead Rate Applied Fixed Costs 8,200 units X $16.00 per unit = $131,200 Next, Calculate the Volume Variance: FC-Volume Variance Budgeted Fixed OH - Applied Fixed Costs Volume Var. $ 128,000 $ 131,200 = $3,200 F 5 Page As you can see, the Fixed Cost-Volume Variance isolates the difference between the planned (budgeted) fixed costs and the amount of fixed costs that were actually allocated to production. In order to understand the Production-Volume variance, we need to take into account the level of fixed costs that were planned for when the Static budget was prepared. Remember, the company planned to produce at a level of 8,000 units. As a result, management acquired enough capacity in terms of plant facilities and equipment to produce at that level. This resulted in a total budgeted fixed overhead cost for the year of $128,000. However, Bettis exceeded its production and sales target by 200 units as 8,200 units were actually produced and sold. Recall that Fixed Costs in TOTAL do not fluctuate with levels of production so the fact that Bettis actually spent $134,000 on Fixed Costs for the period cannot be explained by examining the 200 unit volume difference. Remember, this $6,000 difference was simply a spending variance (items costing more than Bettis had planned). However, Fixed Costs do fluctuate with changes in levels of production on a PER UNIT basis as, in this case, fixed costs are spread out over more units Fixed Costs per Unit Budgeted Fixed OH Units FC per Unit $ 128,000 / 8,000 units = $16.00 $ 128,000 / 8,200 units = $15.60975 FC per Unit FC-Volume Variance Volume Variance 8,200 units X (16.00 - 15.60975)= 0.39025 = $3,200 F Remember, Bettis planned for capacity of 8,000 units when budgeting for fixed costs. However, Bettis was able to produce more units than expected without changing its budget for fixed costs. And, because fixed costs per unit decline at production increases, the Volume Variance is FAVORABLE. Alternatively, an UNFAVORABLE Volume Variance exists when a company plans (budgets) for a certain level of capacity (i.e. fixed costs) and its production falls short. In that case, there is excess (wasted) capacity. 61 Page